Question

An external auditor is trying to determine during her fieldwork if the inventory of a large brick and mortar electronics store chain (competitors to Best Buy or Circuit City) is obsolete, especially in the technology electronics product line.

What characteristics might the auditor use to help establish a model predicting if inventory is obsolete? TIP: Review the 10-K of Best Buy specifically the inventory note for additional guidance.

150 words

Answer 1

The electronic store chain is an example for a dynamic industry where different technological advancement has inverse effect on the stock being obsolete.
The auditor should consider the following points
1. Is the business has an ongoing practice of predicting and interpreting to changes in the market which will effect the inventory adversely. Ensuring that business only maintains the right amount of  inventory  after considering the market condition, customer demand, competitor promotional events etc.
2. To get maximum returns from the existing inventory its is important for the these kind of business to have effective supply chain capabilities where the inventory is in the right location at the right time and in right quantities.
3. Vendor return rights is one of the key elements that will adversely affect our inventory becoming obsolete, the auditor needs to have evidence whether the business as the rights to return the inventory.
4. A provision has to be created for the expected return of inventory by our customer.this will also effect the total inventory and the inventory which is potentially obsolete.

5. The inventory is normally valued at cost or net realizable value which ever is lower. and the cost can be applied on a weighted average method.

The model the auditor uses should consider the above mentioned points while calculating whether the inventory is obsolete.