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ExpandAS No. 1: References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight Board
ExpandAS No. 3: Audit Documentation
ExpandAS No. 4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist
ExpandAS No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements
ExpandAS No. 6: Evaluating Consistency of Financial Statements
ExpandAS No. 7: Engagement Quality Review
ExpandAS No. 8: Audit Risk
ExpandAS No. 9: Audit Planning
ExpandAS No. 10: Supervision of the Audit Engagement
ExpandAS No. 11: Consideration of Materiality in Planning and Performing an Audit
ExpandAS No. 12: Identifying and Assessing Risks of Material Misstatement
ExpandAS No. 13: The Auditor's Responses to the Risks of Material Misstatement
ExpandAS No. 14: Evaluating Audit Results
ExpandAS No. 15: Audit Evidence
ExpandAS No. 16: Communications with Audit Committees
ExpandAS No. 17: Auditing Supplemental Information Accompanying Audited Financial Statements
ExpandAU Section 100 - Statements on Auditing Standards -- Introduction
ExpandAU Section 200 - The General Standards
CollapseAU Section 300 - The Standards of Field Work
AU Section 315 - Communications Between Predecessor and Successor Auditors
AU Section 316 - Consideration of Fraud in a Financial Statement Audit
AU Section 317 - Illegal Acts by Clients
AU Section 9317 - Illegal Acts by Clients: Auditing Interpretations of Section 317
AU Section 322 - The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements
AU Section 324 - Service Organizations
AU Section 9324 - Service Organizations: Auditing Interpretations of Section 324
AU Section 325 - Communications About Control Deficiencies in an Audit of Financial Statements
AU Section 9325 - Communication of Internal Control Related Matters Noted in an Audit: Auditing Interpretations of Section 325
AU Section 9326 - Evidential Matter: Auditing Interpretations of Section 326
AU Section 328 - Auditing Fair Value Measurements and Disclosures
AU Section 329 - Substantive Analytical Procedures
AU Section 330 - The Confirmation Process
AU Section 331 - Inventories
AU Section 332 - Auditing Derivative Instruments, Hedging Activities, and Investments in Securities
AU Section 333 - Management Representations
AU Section 9333 - Management Representations: Auditing Interpretations of Section 333
AU Section 334 - Related Parties
AU Section 9334 - Related Parties: Auditing Interpretations of Section 334
AU Section 336 - Using the Work of a Specialist
AU Section 9336 - Using the Work of a Specialist: Auditing Interpretations of Section 336
AU Section 337 - Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments
AU Section 9337 - Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments: Auditing Interpretations of Section 337
AU Section 341 - The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern
AU Section 9341 - The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern: Auditing Interpretations of Section 341
AU Section 342 - Auditing Accounting Estimates
AU Section 9342 - Auditing Accounting Estimates: Auditing Interpretations of Section 342
AU Section 350 - Audit Sampling
AU Section 390 - Consideration of Omitted Procedures After the Report Date
ExpandAU Section 400 - The First, Second, and Third Standards of Reporting
ExpandAU Section 500 - The Fourth Standard of Reporting
ExpandAU Section 600 - Other Types of Reports
ExpandAU Section 700 - Special Topics
ExpandAU Section 800 - Compliance Auditing
ExpandAU Section 900 - Special Reports of the Committee on Auditing Procedures

AU Section 331

Inventories fn *

Source: SAS No. 1, section 331; SAS No. 43; SAS No. 67. 
Issue date, unless otherwise indicated: November, 1972.


Observation of inventories is a generally accepted auditing procedure. The independent auditor who issues an opinion when he has not employed them must bear in mind that he has the burden of justifying the opinion expressed. [As amended, effective for fiscal periods ending after June 15, 1992, by Statement on Auditing Standards No. 67.]


The purpose of this section is to provide guidelines for the independent auditor in observing inventories. This section relates only to observation of inventories and does not deal with other important auditing procedures which generally are required for the independent auditor to satisfy himself as to these assets. [Revised, December 1991, to reflect conforming changes necessary due to the issuance of Statement on Auditing Standards No. 67.]



[Superseded November 1991 by Statement on Auditing Standards No. 67.] [fns 1–2]



When inventory quantities are determined solely by means of a physical count, and all counts are made as of the balance-sheet date or as of a single date within a reasonable time before or after the balance-sheet date, it is ordinarily necessary for the independent auditor to be present at the time of count and, by suitable observation, tests, and inquiries, satisfy himself respecting the effectiveness of the methods of inventory-taking and the measure of reliance which may be placed upon the client's representations about the quantities and physical condition of the inventories.


When the well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts, the auditor's observation procedures usually can be performed either during or after the end of the period under audit.


In recent years, some companies have developed inventory controls or methods of determining inventories, including statistical sampling, which are highly effective in determining inventory quantities and which are sufficiently reliable to make unnecessary an annual physical count of each item of inventory. In such circumstances, the independent auditor must satisfy himself that the client's procedures or methods are sufficiently reliable to produce results substantially the same as those which would be obtained by a count of all items each year. The auditor must be present to observe such counts as he deems necessary and must satisfy himself as to the effectiveness of the counting procedures used. If statistical sampling methods are used by the client in the taking of the physical inventory, the auditor must be satisfied that the sampling plan is reasonable and statistically valid, that it has been properly applied, and that the results are reasonable in the circumstances. [Revised, June 1981, to reflect conforming changes necessary due to the issuance of Statement on Auditing Standards No. 39.]


When the independent auditor has not satisfied himself as to inventories in the possession of the client through the procedures described in paragraphs .09 through .11, tests of the accounting records alone will not be sufficient for him to become satisfied as to quantities; it will always be necessary for the auditor to make, or observe, some physical counts of the inventory and apply appropriate tests of intervening transactions. This should be coupled with inspection of the records of any client's counts and procedures relating to the physical inventory on which the balance-sheet inventory is based.


The independent auditor may be asked to audit financial statements covering the current period and one or more periods for which he had not observed or made some physical counts of prior inventories. He may, nevertheless, be able to become satisfied as to such prior inventories through appropriate procedures, such as tests of prior transactions, reviews of the records of prior counts, and the application of gross profit tests, provided that he has been able to become satisfied as to the current inventory.

Inventories Held in Public Warehouses fn 3


If inventories are in the hands of public warehouses or other outside custodians, the auditor ordinarily would obtain direct confirmation in writing from the custodian. If such inventories represent a significant proportion of current or total assets, to obtain reasonable assurance with respect to their existence, the auditor should apply one or more of the following procedures as he considers necessary in the circumstances.

  1. Test the owner's procedures for investigating the warehouseman and evaluating the warehouseman's performance.
  2. Obtain an independent accountant's report on the warehouseman's control procedures relevant to custody of goods and, if applicable, pledging of receipts, or apply alternative procedures at the warehouse to gain reasonable assurance that information received from the warehouseman is reliable.
  3. Observe physical counts of the goods, if practicable and reasonable.
  4. If warehouse receipts have been pledged as collateral, confirm with lenders pertinent details of the pledged receipts (on a test basis, if appropriate).

[As amended, effective after August 31, 1982, by Statement on Auditing Standards No. 43.]

Effect on the Auditor's Report


For a discussion of the circumstances relating to receivables and inventories affecting the independent auditor's report, see sections 508.24 and 508.67. [As amended, effective for periods ending on or after December 31, 1974, by Statement on Auditing Standards No. 2. Paragraph renumbered by the issuance of Statement on Auditing Standards No. 43, effective after August 1982.]

Footnotes (AU Section 331 — Inventories):

fn * Title amended, effective for audits of fiscal periods ending after June 15, 1992, by Statement on Auditing Standards No. 67.

[fns 1–2] [Superseded November 1991, by Statement on Auditing Standards No. 67.]

fn 3 See section 901 for Special Report of Committee on Auditing Procedure.

Copyright © 2002, American Institute of Certified Public Accountants, Inc.