Inventory Auditing Standards: Insights from AAERs and CAMs

SUMMARY The Public Company Accounting Oversight Board (PCAOB) recently added inventory to its standard-setting agenda (PCAOB 2023b) to address recent economic developments and concerns that inventory audit standards have not significantly changed since 1939. Existing inventory standards primarily address inventory observation and inventory quantities. We provide insights into inventory audit issues by examining Accounting and Auditing Enforcement Releases (AAERs) from 2000 to 2022. We supplement this by reviewing critical audit matters (CAMs) from 2019 to 2023 to examine inventory audit risks and problem areas identified by auditors. The most common inventory issue in CAMs and AAERs involves obsolescence. Although many AAERs involve pricing and observation issues, these are rarely identified in CAMs. Our research highlights inventory areas where frauds and other significant misstatements have occurred. Audit practitioners can use these results to communicate these significant risks and revise audit procedures to address these risks. Data Availability: Data are available from the public sources cited in the text.