The management of Agrawal Garments (P) Ltd. insists that as a part of statutory audit, the auditors must carry out physical verification of fixed assets and inventories as a means of collection the necessary audit evidence as also to detect any frauds.

Auditing and Assurance Revision Questions and Answers

Answer
The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. Audit evidence is obtained from a mix of tests of control and substantive procedures as the auditor considers appropriate. With regards to the inventory, which is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition attendance at physical inventory counting unless impracticable. Such attendance will enable the auditor to inspect the inventory, to observe effective compliance with the operation of management‟s procedures for recording and controlling the results of the count and to provide evidence as to the reliability of management‟s procedures. It is not the duty of auditors to carry out physical verification of inventories on their own as insisted the management of Agrawal Garments
(P) Ltd. with a view to collect necessary audit evidence as also to detect any frauds. Because of the test nature and other inherent limitations of an audit, together with the inherent limitation of any accounting and internal control system, there is an unavoidable risk than even some material misstatements and frauds may remain undetected.



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