Below attached is the written article Covid 19 consideration for inventory audit testing

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Reference: https://www.icaew.com/technical/audit-and-assurance/audit/quality-control/coronavirus-considerations-for-inventory-audit-testing

Introduction

COVID-19 pandemic has affected businesses and seemingly disrupted their processes. As pandemic continues to suppress enterprises, it significantly poses a huge strain on inventory management and audit. Due to the inability to physically report to the warehouse or office, the traditional way of inventory keeping and reconciling makes it hard for both the management and auditors. In effect, the validity of record-keeping and reliability of audit opinion might be viewed as unsubstantial. Inventories are the delicate resources of every business, and it is their lifeblood. Inventories are significant company assets that require substantial record-keeping and reasonable audits to track and evaluate its ability to procure income for the Company.

Issues and discussions

The less restrictive "Recovery Movement Control Orders" (RMCO) are continued in several areas of Malaysia. Due to this, most companies may function under the RMCOs. However, there are public areas where social distance restrictions are difficult to implement. The suppliers of public transit can guarantee that specific mandates are fulfilled to limit the distribution of the COVID-

19 pandemic. These measures might cause delays in transportation and management of inventories. Hence, the administration can monitor stocks using CCTV cameras and remote counting using drones and robots. Suppose the management cannot predict correct future sales of inventories. In that case, the Company will incur a cost on inventories which price on inventories will increase the costs of operations and reduce the profits of the Company. Inventories located at different locations require extra effort for inventory management, and monitoring might be insufficient since the basis for inventory flow might differ from every location. It is quite impossible to monitor the flow of inventories without referring to actual inventory counts. Therefore, having the physical counts is ideal for reflecting actual inventory performance within the period.

In addition, the projection for needed inventories will be complex for the management because of the uncertainty of time and condition. The resumption of normal business operations is still unsure as the pandemic continues to mutate. Operations are still limited, and the market movement is controlled. Businesses have no concrete budgetary plan for production since it is dependent on the market condition. Management can't risk mass production for inventory reserve since it poses a huge risk of loss in the future. At the same time, they cannot completely halt production due to opportunity costs and high period costs that outweigh minimal income. Inventories produced should be based on the latest sales volume during the pandemic, wherein the market is responsive, and the Company gains profit.

Inventories held for sale in the ordinary course of business are measured in lower amounts between cost and net realizable value. According to MFRS 102, Net Realizable Value ("NRV") is a typical way of evaluating the inventory accounting value of an asset. Thus, when the inventories are stored and not sold, the expiration period approaches. As a result, the Company will want to sell the old stocks first, even at lower prices, to eliminate the accumulating stock. The Covid 19 pandemic will reduce the transportation of inventories, so large quantities of stocks will be stored at warehouses. In short, the inventories will start approaching their expiration dates, and therefore, the Company will want to get rid of the stock before it expires. There will be an increase in supply which will reduce its fair prices. As a result, there will be an increase in the cost of sales. Hence, NRV evaluates inventory values. However, as COVID-19 continues, it suppresses firms' ability to forecast optimal inventory and accumulates losses.

Furthermore, during the pandemic, inventories are slowly moving and ageing, meaning they will be sold in the future. This means more estimated costs might be incurred, resulting in an inventory valued higher than the selling price. This risks the companies ability to maximize its inventories and generate profit.

As inventories are considered aged, it requires an extensive evaluation of whether the current or excess inventories should be written down. According to MFRS 102, if the estimated cost considerably exceeds the selling price, inventories should be written down and expensed. Considering that the pandemic timeline is uncertain, there is no absolute assurance that the concurrent inventories will sell sufficiently to generate profit to satisfy period and product costs. Management will then need to write down the inventory value due to the slow-moving inventories during the pandemic. This will lead to reduced in the Company's income.

The Company produces differentiated products, and is not both are affected by the COVID-19 pandemic. Therefore, it is better to separate inventory categories. Separation of the products affected and not affected by COVID- 19 pandemic is not just because their treatment and market strategies are different. If the product is affected by covid, the analysis should be doing if it still sells. On the other hand, if the product is profitable amidst the pandemic, it can be synergized more to produce sufficient income to cover the losses or cost of other product lines. Indeed, separating product categories will benefit the management's ability to plan and cultivate their inventories more.

Due to the inability to perform stocktake at the end of the financial year, the Company may change their reporting period, leading to further unpredictability in inventories. It will lead to two possibilities, either the condition will be getting better or worsen. The market is still not active and unstable, making it hard for businesses to revitalize their inventory management. In addition, the delay can impose certain risks with the current inventories, such as theft and loss.

Furthermore, the change in year-end also leads to additional compliance costs, such as tax and audit fees, etc., due to other work required.

Accordingly, for auditors, inventories should be appropriately documented and evaluated using alternative procedures to obtain the evidence of net realizable value objectively. One way to prove the evidence of the net realizable value is to roll forward or backwards. In applying this, auditors will postpone inventory audits at a later and safer date. As such, they can use subsequent measures at a later period to perform and observe inventory count. The objective of the method is to test the accuracy of inventory records and reconcile it at a more favourable period. If an audit of stock is urgent, the auditors can also perform virtual stocktakes to obtain sufficient appropriate audit evidence. This method is considered because it is stated in the ISA 501 that if it is impractical to do physical inventory count and if it would endanger the health of auditors, the auditor may apply any proper method to achieve the objective. However, it is important to denote that there are risks associated when auditing is remotely done, such as the risk of manipulation and faithful representation of records.

Companies should highly integrate performance materially. It is less than the overall materiality level and is lowered to accommodate for the chance of a series of minor errors or omissions not being discovered by the auditor. These more minor things can be substantial when combined. They accommodate the performance materiality level. As a result, the materiality of performance is less likely to exceed the total quantity of uncorrected and unrecognized errors than the overall materiality level of the financial statements. The amount that can exist in the accounts due to omissions and errors that do not influence the audit opinion on the concept of having unbiased financial statements is referred to as performance materiality. This indicates that the more COVID's negative influence on inventories affects them, the more product deviations are reported in the financial accounts. Also, this should be part of the audit opinion to measure how significant the impact occurred to the Company and rule out any biases. In this way, faithful representation will be achieved, and the actual effect of the pandemic will be reflected.

The physical costs associated with keeping the inventories at the warehouse can be dire and unfavourable. One of the costs is storage costs, as storage costs are additional period costs that the Company constantly incurs. The more inventories are kept, the more storage costs will be accumulated. Some examples of this are rent and utilities. Too much storage costs can also indicate that the goods are not profitable and out of demand. Storage cost should not exceed the value of each inventory over time. If it results in this, it is better to consider writing down the inventories totheirt net realizable value. The most important is that having higher storage costs due to unmarketable reasons will expose the Company to a higher risk of operating loss on its financial statements. Disposal of any inventories is necessary when the storage costs become higher than the actual value for them. Writing down the stocks should be done while the Company is still generating income than after incurred losses.

As much as technologies are high-tech and advanced in terms of auditing, it has different implications. Some consider using robotics and other highly productive technologies to proceed to audit during the current situation. Even though new techniques may be used to monitor and test inventories, gadgets such as drones and robotics can be used in such operations. However, they are subject to manipulation if resolutions are not high quality and qualified people do not control them. Even though it is convincing, it is highly debatable as there is no assurance that the physical counts cannot be manipulated upon video recording or technological tests. Next, the scope of the audit is not maximized as auditors can only get what was only perceived in the screens or systems. Finally, the state or condition of the inventories cannot be assessed whether it is defective or not.

Recommendation.

Auditors are required to change the audit approach for verification of Inventory during Covid 19, which includes remote auditing in virtual through technologies like cameras, drones, Artificial Intelligence tools, and feeds of video. Moreover, assign a team or staff that would be solely in charge for monitor inventory activities. It is better if they can access through the computer on pre-covid inventory records. But during the pandemic, they can use applications to monitor inventory warehousing and distribution within various locations. Most significantly, if they are involved with the e-commerce industry. Next, use the current business software or program to keep an up-to-date record of inventories. This enables the management of inventory movement using an end-to-end process. The Company can easily document information used for audit purposes and as a basis for future decision-making. Finally, have proper and regular documentation on inventory value. Determine whether they are marketable enough to keep or NRV is still positive. Otherwise, opt to write it down. Provide and submit regular reports monthly to executives to construct an optimal inventory management plan. This will avoid the accumulation or loss and too much storage costs. Audit opinion should be specific on a certain inventory depending on their performance and contribution to income. This can be the basis of the Company on how to ease and manage differentiated inventories.

Conclusion

The management and auditors' roles are distinct but vital in every business operation regardless of the industry. The management is responsible for overseeing business processes related to inventory management and providing accurate and faithful information. On the other hand, auditors are the ones who evaluate such documents and business processes and provide an audit opinion that would greatly benefit the decision-making of the Company. In the current challenging situation, both the management and auditors should work hand-in-hand to assure the sustainability of businesses. In a nutshell, Auditors have been given the responsibility of writing financial reports and providing valuable pieces of advice to companies. However, during the pandemic, everyone must support the management and ensure that companies do not incur unnecessary losses since they play a vital role in the economy.