The classic inventory observation was one of those audit areas that nobody was planning on conducting remotely. At least not any time soon.
Enter a global pandemic…
With travel and social restrictions, not to mention some businesses legally not being able to open, inventory observations have proved a tough challenge for audit teams to say the least.
Can we observe inventory virtually and still obtain sufficient and appropriate audit evidence? Also, if the good ‘ol physical count observation is no longer practicable, which alternative procedures are firms using?
Yes, It Is Possible To Observe Inventory Without Being On-Site
In a recent Journal of Accountancy article AICPA Chief Auditor Bob Dohrer says yes you can. “it is possible for auditors to observe inventory without being on-site, under generally accepted auditing standards issued by the AICPA Auditing Standards Board.”
I think that most accountants and auditors would probably agree that from a conceptual standpoint, auditing standards generally address “what” evidence is required rather than dictating the specific “how” it should be obtained.
In this case, however, we do have standards that specifically address the physical observation of inventory such as included in AU-C Section 501 paragraphs .11; .14 and .A34 which states “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, when inventory is held in a location that may pose threats to the safety of the auditor)”.
Dohrer continued by stating that he thinks it’s a very reasonable interpretation of paragraph .A34 to say that COVID-19 is putting auditors’ safety in jeopardy.
Paragraph .14 states “If attendance at physical inventory counting is impracticable, the auditor should perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory”.
Fantastic! That means the auditor is free to craft their own alternative creative and innovative procedures. But what might those procedures be…?
Ok, But Which Alternative Procedures..?
Based on our research it seems that the most popular method being employed or considered is using video technology.
But, what are some of the key considerations or best practices being developed by employing video to remotely conduct the inventory observation?
According to EideBailly, auditors need to ensure they are observing a real-time video feed (no recorded shenanigans!), be able to verify the video streaming is taking place at the specified location and the inventory needs to be organized in such a way that it is practical to count remotely.
The Drone Diagnosis
Recently I spoke with an audit firm and client of SAPRO, regarding the virtual inventory observation conundrum. They were able to successfully conduct the observation using a drone.
Drone technology may be particularly well suited to assist in conducting inventory observations. For example, the CPA Journal noted that drones may be fitted with a “sensor which detects certain chemical compounds in odors that indicate decay.”
A drone can also take pictures during the observation which the auditor can then run through image recognition software that employs artificial intelligence to perform an inventory count based on the picture!
Drone assisted inventory observations have existed pre-pandemic, like this coal reserve count audit conducted by PwC.
Could this become the new normal in the near post-pandemic future? The “video tech-savvy auditor” may just become an actual thing!
P.S. If you want to learn more about why audit firms trust us with providing the highest quality on-demand audit staff on a project basis, not just for your inventory observations, but your busy periods throughout the year, then schedule a free consultative call here.