(AU-C 330.A64)
NOTE: Even if the misstatement detected at an interim date is corrected prior to year-end, there may be implications for evaluation of misstatements at year-end. Unless the auditor has applied procedures sufficient to provide reasonable assurance that similar misstatements have not occurred, the auditor may need to project a misstatement from interim to year-end.
Considering Control Risk When Testing at an Interim Date
When performing principal substantive tests at an interim date, the primary control focus is on asset safeguarding and controls that address the completeness assertion. If the design of these controls is not effective, then the substantive tests related to existence and completeness assertions should be applied at year-end.
Keep in mind that this consideration is tied to specific assertions, not to the overall account. For example, confirmation of receivables does not address the completeness assertion, which means that receivables could be confirmed at an interim date even if controls to address completeness were not effectively designed. However, the auditor would still need to consider the nature, timing, and extent of further audit procedures related to the completeness assertion.
Length of Remaining Period
How long can the remaining period be? Section 330 offers only the general observation that the potential for increased audit risk tends to become greater as the remaining period becomes longer.
In practice, many auditors believe the remaining period should not exceed three months (i.e., for a December 31 audit, testing certain balances as of September 30). Another rule of thumb is to consider a remaining period of one month as creating a relatively low increase in audit risk. Ordinarily, if the remaining period is one month, substantive tests to cover the remaining period can be restricted to tests such as:
Comparison of the account balance at year-end with the balance at the interim date to identify unusual amounts or relationships.
Investigation of unusual amounts or relationships.
Application of other analytical procedures to the year-end balance.
Naturally, as with any rule of thumb, the auditor should be aware that in specific circumstances, factors may increase audit risk, and the principal substantive tests will have to be applied at year-end.
Designing Audit Procedures
There is an almost infinite variety of approaches that an auditor can use in practice to achieve the objectives of AU-C 330. The following chart shows some examples of further audit procedures that may be performed to meet certain audit objectives.
| Illustrative assertions about account balances | Examples of substantive procedures |
| Existence or Occurrence | |
| Inventories included in the balance sheet physically exist. | Observing physical inventory counts. Obtaining confirmation of inventories at locations outside the entity. Testing of inventory transactions between a preliminary physical inventory date and the balance sheet date. |
| Inventories represent items held for sale or use in the normal course of business. | Reviewing perpetual inventory records, production records, and purchasing records for indication of current activity. Comparing inventories with a current sales catalog and subsequent sales and delivery reports. Using the work of specialists to corroborate the nature of specialized products. |
| Completeness | |
| Inventory quantities include all products, materials, and supplies on hand. | Observing physical inventory counts. Analytically comparing the relationship of inventory balances to recent purchasing, production, and sales activities. Testing shipping and receiving cutoff procedures. Obtaining confirmation of inventories at locations outside the entity. |
| Inventory quantities include all products, materials, and supplies owned by the entity that are in transit or stored at outside locations. | Analytically comparing the relationship of inventory balances to recent purchasing, production, and sales activities. Testing shipping and receiving cutoff procedures. |
| Inventory listings are accurately compiled and the totals are properly included in the inventory accounts. | Tracing test counts recorded during the physical inventory observation to the inventory listing. Accounting for all inventory tags and count sheets used in recording the physical inventory counts. Testing the clerical accuracy of inventory listing. Reconciling physical counts with perpetual records and general ledger balances and investigating significant fluctuations. |
| Rights and Obligations | |
| The entity has legal title or similar rights of ownership to the inventories. | Observing physical inventory counts. Obtaining confirmation of inventories at locations outside the entity. Examining paid vendors’ invoices, consignment agreements, and contracts. |
| Inventories exclude items billed to customers or owned by others. | Examining paid vendors’ invoices, consignment agreements, and contracts. Testing shipping and receiving cutoff procedures. |
| Valuation or Allocation | |
| Inventories are properly stated at cost (except when market value is lower). | Examining paid vendors’ invoices. Reviewing direct labor rates. Testing the computation of standard overhead rates. Examining analyses of purchasing and manufacturing standard cost variances. |
| Existence or Occurrence | |
| Slow-moving, excess, defective, and obsolete items included in inventories are properly identified. | Examining an analysis of inventory turnover. Reviewing industry experience and trends. Analytically comparing the relationship of inventory balances to anticipated sales volume. Touring the plant. Inquiring of production and sales personnel concerning possible excess of obsolete inventory items. |
| Inventories are reduced, when appropriate, to replacement cost or net realizable value. | Obtaining current market value quotations. Reviewing current production costs. Examining sales after year-end and open purchase order commitments. |
| Presentation and Disclosure | |
| Inventories are properly classified in the balance sheet as current assets. | Reviewing drafts of the financial statements. |
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The major categories of inventories and their bases of
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