An auditor is reviewing the client's inventory records for potential obsolescence. The client manufactures electronic components, an industry characterized by rapid technological change. Which of the following audit procedures would be most effective in identifying obsolete inventory that should be written down?
- AComparing the recorded cost of inventory to recent sales prices of similar products.
- BReviewing perpetual inventory records for inventory turnover rates and comparing to industry averages.
- CObserving the physical inventory count and noting damaged or slow-moving items.
- DInquiring of production and marketing personnel about product lines, sales forecasts, and technological changes.
Show answer & explanationAnswer & explanation
Correct answer: D. Inquiring of production and marketing personnel about product lines, sales forecasts, and technological changes.
In an industry with rapid technological change, obsolescence often stems from new product introductions or shifts in demand, which are best understood by those directly involved in production and sales. Inquiring of production and marketing personnel about product lines, sales forecasts, and technological changes directly taps into the most current and relevant information regarding the future salability and utility of the inventory, making it highly effective for identifying obsolescence.
Why the other options are wrong
- A. Comparing cost to recent sales prices (net realizable value) is a crucial step in the lower of cost or NRV test, but first, the auditor needs to *identify* which inventory items are at risk of obsolescence, which is what the inquiries help achieve.
- B. Reviewing turnover rates can indicate slow-moving inventory, but it's a lagging indicator and may not specifically explain *why* inventory is slow-moving (e.g., technological obsolescence vs. simply a bad sales period).
- C. Physical observation is useful for identifying physically damaged or visibly slow-moving items but may not capture technological obsolescence for items that appear fine but are functionally outdated.
Auditing Inventory Obsolescence
Auditing inventory obsolescence involves assessing whether inventory items are no longer marketable or useful due to technological changes, changes in customer demand, or other factors. Obsolete inventory must be written down to its net realizable value (NRV) if that is lower than cost.
- Obsolescence risk is higher in industries with rapid technological change or fashion trends.
- Auditors use a combination of procedures, including inquiry, observation, and analysis of sales data.
- The Lower of Cost or Net Realizable Value (LCNRV) rule is applied to value inventory.
- Inquiries with production and sales personnel are highly effective for forward-looking assessment.
Memory trick: To find OBSOLETE tech, TALK to the CREATORS and SELLERS.