DATE: 07 May 2014 CIRCULAR 2014 / 01 Guide on audit of game / livestock Background This guide addresses the question on the implication on the auditor s report when livestock/ game has not been physical verified and or when the fair value cannot be measured reliably. Introduction Livestock would be recognised in terms of IAS 41 as a biological asset. Game farming in general would not fall under IAS 41 as the animals are not subject to a process of active management and/or control. Nevertheless, both are assets of which the primary audit concerns are the assertions existence, right to assets, completeness and valuation. For game, the auditor should determine whether the client can exercise any control over the animals, in order to determine whether a biological asset can, in actual fact, be recognized. Livestock, on the other hand, is usually subjected to a type of control (for example fenced in, regular counts are performed and lists kept, and are registered, etc). The International Standards on Auditing give no real guidance as to biological assets in particular, however it does for inventories. Therefore we recommend falling back unto the principles related to the attendance of inventory counts. International Standard on Auditing (ISA) ISA 501 Audit evidence specific considerations for selected items includes requirements and application material relating to inventory and, in particular, obtaining audit evidence by attendance at physical inventory counting (stock takes). The guidance is intended to assist auditors in applying the requirements of, and should be read in conjunction with, the related ISA s. International Standard on auditing requirements: ISA 501 If inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by: a) Attendance at physical inventory counting, unless impracticable to: a. Evaluate management instructions and procedures for recording and controlling the results of the entity s physical inventory counting; b. Observe the performance of management s counting procedures; c. Inspect the conditions of inventory; and d. Perform test counts. b) Performing audit procedures over the entity s final inventory records to determine whether they accurately reflect actual inventory count results. c) If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the procedures required by the paragraphs above
perform audit procedures to obtain evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. d) If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures intervening transactions. (Refer to ISA 330 par. 22 23 which provides guidance on substantive procedures at an interim date). e) If attendance of physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient and appropriate audit evidence regarding the existence and conditions of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor s report in accordance with ISA 705. Application and other explanatory material The extent of auditor s attendance at stock-taking would depend upon his assessment of the efficiency of relevant internal control procedures, and the results of his examination of the stock records maintained by the entity and of the analytical review procedures performed. Attendance at physical inventory counting if impracticable In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor. The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as explained in ISA 200, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. In some cases where attendance is impracticable, alternative audit procedures, for example inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to physical inventory counting or inspection of the NAMLITS stock register, may provide sufficient and appropriate audit evidence about the existence and condition of inventory. NAMLITS is a prescribed cattle tagging system which is independently administered by the Directorate of Veterinary Services ( DVS ) of the Namibian Ministry of Agriculture. All cattle older than 6 month have to be tagged with electronic and visual eartags, which have to be registered at DVS. DVS annually inspects all commercial farms in Namibia and verifies the tagging of all cattle. On the NAMLITS system herd statements of cattle can be obtained which show all cattle registered on all commercial and communal farms. These herd statements always represent the current (as at the date of request) number of Livestock registered on the farm with the corresponding individual eartag number. No historical herd statements are available from the system. As the NAMLITS stock register represents a third party confirmation of livestock on hand and will therefore be an alternative audit procedure verify existence and completeness of livestock if actual stock counts are impractical. If it is not be possible to obtain sufficient and appropriate audit evidence by performing alternative audit procedures, ISA 705 requires the auditor to modify the opinion in the auditor s report as a result of the scope limitation. This would also include instances where the client does not support the auditor in performing a physical inspection of livestock due to anticipated excessive costs.
Fair value determination Biological assets are measured at fair value less costs to sell. The presumption that a biological asset can be measured at fair value less cost to sell can be rebutted only on initial recognition when market-determined prices or values are not available and estimates may be unreliable. In these cases the asset is stated at cost less any accumulated depreciation and impairment losses. If the fair value subsequently becomes reliably determinable, then the asset is measured at fair value less cost to sell. In measuring fair value, assets may be grouped according to their significant attributes. Livestock may be grouped according to age or weight.. Market values of most livestocks are weekly published by the Namibian Agricultural Union and are as well available from all livestock Auctioneers in Namibia. If it is not possible to obtain sufficient and appropriate audit evidence on the fair value calculation performed by management and the auditor cannot perform alternative audit procedures ISA 705 requires the auditor to modify the opinion in the auditor s report as a result of the scope limitation. ISA 705: Modifications to the opinion in the independent auditor s report Par 7 (b) [The auditor shall qualify his opinion if ] The auditor is unable to obtain sufficient and appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effect on the financial statements of undetected misstatements, if any could be material but not pervasive. Par 9 The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient and appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effect on the financial statements of undetected misstatements, if any, could be both material and pervasive. Example wording for par 7 (b): Basis of Qualified Opinion The company did not carry out a physical count of its livestock / We were unable to observe the count of livestock, due to limitation placed on the scope of our work by the company. The company s records did not permit the application of alternative auditing procedures that we could perform. Consequently, we did not obtain all the information and explanations we considered necessary to satisfy ourselves as to the completeness, accuracy and existence of livestock. Qualified Opinion In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of XXX Company as at XXX, and its financial performance and its cash flows for the year then ended in accordance with XXXX. Example wording for par 9: The company livestock is carried at XXX on the company s statement of financial position, which represents over 90% of the company s net assets as at xxxx. We were not able to observe the count of livestock, due to limitation place on the scope of our work by the company. As a result, we were unable to determine whether any adjustments were necessary in respect of the livestock value.
Disclaimer of Opinion Because of the significance of the matter described in the Basis of Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements. Conclusion: The auditor must through physical attendance at the inventory count, or any other audit procedures satisfy himself as to the existence, valuation and completeness assertions of livestock / game. If the auditor is unable to obtain sufficient and appropriate audit evidence, for the purpose of verifying the existence and the fair value of livestock/game, the audit report should be modified accordingly. Sufficient documentation should be on the audit file to support the modification given. J de la Rey du Toit Chief Executive Officer Institute Of Chartered Accountants of Namibia XXXXXX 2013, Windhoek, Namibia