Tests of details, confirmations and inventory

Translate the risk into an observable test

Tests of details examine transactions, balances or disclosures directly. A useful procedure says what to inspect, where to obtain it and what it establishes. “Check receivables” is incomplete; “match later receipts to the year-end invoices they settle” identifies evidence relevant to recoverability.

Transaction testing examines movements, such as equipment additions and disposals. Balance testing examines closing components, such as amounts owed by individual customers. Both approaches may contribute to the same conclusion. A purchase invoice supports the recorded cost of machinery, while inspection helps establish existence and contractual evidence helps establish rights.

Perform substantive procedures for every material transaction class, balance and disclosure. Reconcile the statements and disclosures to their supporting records and examine material closing journals and adjustments. When work is performed before year-end, cover the intervening period through substantive procedures with control tests, or further substantive procedures alone where sufficient. Unexpected interim errors require reconsideration of the remaining work.

Concept sources: ASA 330, December 2021, paragraphs 18–23 — substantive coverage, closing procedures and interim work.

Management override requires specific work regardless of the assessed likelihood: test journals and other reporting adjustments, review estimates for bias and examine the business rationale of significant unusual transactions. Include year-end journal selections, consider testing throughout the year and look back at significant prior-year estimate judgements. These procedures are not limited to whichever entries happen to exceed a monetary threshold.

Concept sources: ASA 240, December 2023, paragraphs 32–34 — responses to management override in the guide's standards context.

Choose a starting point that can reveal the error

For possible overstatement, start with recorded items and seek supporting transactions or assets: vouching. For possible omission, start with an appropriate source outside the relevant ledger listing and follow items into the accounting records: tracing. Testing only what was recorded cannot reliably expose what was left out.

Concept sources: ASA 500, A31–A32; ASA 505, A18–A19 — original assertion-focused applications.

Use confirmations for questions an outside party can answer

An external confirmation is a direct written response to the auditor from a third party. It can address balances, contractual terms, guarantees, securities, inventory held elsewhere or the absence of side agreements. Select a knowledgeable respondent and ask for information that addresses the actual risk.

A customer's acknowledgement supports a receivable's existence more directly than its recoverability. A supplier request may help identify unrecorded liabilities, but completeness depends on selecting appropriate suppliers and requesting appropriate information. Restricting requests to large recorded balances can miss omitted or apparently nil balances.

The auditor controls the information requested, recipient selection, request design, dispatch and follow-up. Validate addresses and arrange direct replies. A response forwarded through management requires further assessment. Disclaimers, restrictions, unexpected contact details and signs of alteration can reduce reliability.

Distinguish a reply from silence

A positive request asks the recipient to reply whether agreeing or disagreeing, or to provide specified information. A negative request asks for a reply only if the recipient disagrees. Silence on a negative request does not show that it was received or checked.

Negative requests may serve as the sole substantive response to an assertion risk only when all ASA 505 conditions hold: low assessed risk supported by effective relevant controls; many small homogeneous items; a very low expected exception rate; and no known reason recipients would disregard the request. Large or heterogeneous balances and higher risks generally favour stronger evidence.

Concept sources: ASA 505, paragraphs 7 and 10–16 — original confirmation evaluation sequence.

Resolve nonresponses and disagreements

For a receivable nonresponse, alternatives may include later receipts, dispatch records and sales documentation. For payables, later payments and goods-received records may help. A nonresponse is missing evidence, not automatic proof that the balance is wrong. If a positive reply is necessary for sufficient appropriate evidence, alternatives cannot replace it; assess the reporting implications if it remains unavailable.

Investigate disputed prices, returns and cutoff differences rather than accepting them as routine timing items. If management refuses permission to confirm, assess its reasons, fraud implications and alternative evidence. An unreasonable refusal or inability to obtain suitable alternatives requires governance communication and consideration of the opinion.

Examine the full banking relationship

Bank confirmations may reveal deposits, borrowings, security, guarantees and treasury arrangements as well as cash balances. Reconcile the bank's response with accounting records and investigate reconciling items, including subsequent clearance. A bank balance alone cannot validate every outstanding deposit or payment.

GS 016 supports risk-based decisions about bank requests, including significant, complex or unusual banking, heightened fraud risk and relevant control deficiencies. Straightforward banking with low risk and sufficient alternative evidence can support a decision not to confirm.

The guidance includes a General request for ordinary banking and a Treasury and Other Operations request for relevant specialised arrangements. Select the scope needed for the entity rather than sending a form without considering its activities.

For electronic replies, consider origin, respondent authority and transmission integrity. Secure processes, verified contact channels and digital authentication can improve reliability. GS 016's June 2022 guidance also addresses firm-approved confirmation platforms and service-provider controls. Platform use does not remove the team's responsibility to follow applicable policies and remain alert to contradictory information.

Concept sources: GS 016, June 2022, paragraphs 6–9 and 22–37; ASA 505, A11–A14 — banking scope and electronic reliability.

Attend inventory counts with a defined purpose

For material inventory, attend physical counting unless impracticable. Evaluate count instructions, observe their application, inspect condition and perform test counts. Plan for locations, movement during counting, perpetual records and any specialist knowledge needed. Management counts its inventory; the auditor evaluates and tests that process.

Select recorded items and locate them for existence. Select physical items and trace them into count records for completeness. Reconcile discrepancies and connect retained count evidence to the final inventory listing. Capture receiving and dispatch information needed to test cutoff. If counting occurs on another date, test intervening movements.

General inconvenience is not enough to make attendance impracticable. If attendance is genuinely impracticable, seek sufficient appropriate alternative evidence; otherwise consider a modified opinion. Unforeseen inability to attend calls for counting at an alternative date and testing intervening transactions. Material inventory held by others needs confirmation and/or suitable inspection or other procedures.

Concept sources: ASA 501, December 2021, paragraphs 4–8 and A3–A16 — attendance, count evidence and alternatives.

Complete valuation and disclosure work separately

Counting establishes neither ownership nor the correct carrying amount. Test recorded unit costs and calculations; examine slow-moving, damaged and obsolete items; and assess evidence supporting net realisable value. Check classification, valuation policies and pledged inventory disclosures against applicable requirements.

Receivable allowances and inventory write-downs involve estimation. Challenge the relevant data, method and assumptions instead of checking arithmetic alone. Later collections or sales can inform those judgements, but consider whether they reflect conditions at year-end. Disclosures must communicate relevant uncertainty. The depth of work responds to estimation uncertainty, complexity, subjectivity and possible management bias.

Concept sources: ASA 540, December 2022, paragraphs 2–9 — estimation risk and evaluation of methods, assumptions, data and disclosures.

Sources and further reading

• ASA 330 — substantive procedure requirements.
• ASA 500 — relevance and reliability of evidence.
• ASA 501 — inventory attendance and custody.
• ASA 505 — confirmation design and evaluation.
• GS 016, June 2022 — bank confirmation guidance.
• ASA 540, December 2022 introduction — accounting estimates and related disclosures.