Audit of Inventory: Keegan Murphy Cattle Ranch

Overview

This case focuses on the inventory process in the context of a cattle  ranch. Students will learn about how companies and their auditors  perform periodic inventory counts, with a focus on the innovative  practice of using drones and automated counting software to complete the  inventory process. While the case uses biological assets (cattle) as an  example for using drones in counting inventory, it also encourages  students to consider the use of drones in other, more traditional  inventory counts, such as in a warehouse.

Background

You are an auditor tasked with verifying the inventory of Keegan  Murphy Cattle Ranch (KMCR). KMCR owns a large cattle ranch, and the herd  represents an important biological asset (i.e., living animals) of  KMCR. It is, therefore, crucial that the company maintains an accurate  count of the inventory. Each year, KMCR performs an inventory count as  it moves the cattle from their winter pasture to their summer pasture.  The cattle are not easy to count in this process because there are large  numbers of them, they continually move around, and they can be hard to  distinguish from one another.

The traditional method of counting the cattle is to have cowboys and  dogs herd them through a narrow chute, where two people count the  animals as they pass through (the counters). This process is  time-consuming, stressful for the animals, and potentially inaccurate  due to the fast movement of the cattle.

KMCR reported that it sent 2,500 cattle to the winter pasture (these  cattle arrived on trucks two months earlier, and this count can be  considered correct). While in the winter pasture, the ranch hands found  the carcasses of four cattle (likely killed by predators), and two  additional cattle were sick and could not make the trip to the summer  pasture. Thus, the ranch hands expected 2,494 cattle in their count  based on the current inventory records; however, it is possible that  other cattle wandered away or were killed by predators and the ranch  hands were unaware of their disappearance. The two counters initially  reported counting 2,489 and 2,501 cattle. After deliberation, they  agreed to make the final count 2,495 cattle. KMCR management adjusted  the accounting inventory records accordingly.

Part I: Imagine Better and Learn More

Using Drone Technology and Automation to Innovate Inventory Management and Auditing of Inventory

Required

KMCR is interested in making the inventory count process more  efficient and less stressful for the cattle. It is also interested in  improving the accuracy of the inventory data, improving the timeliness  of the reporting, and having the process documented in a better manner.  KMCR has hired you, an outside consultant, to provide information about  using drone technology and automated counting software for the physical  inventory count instead of using the traditional process. KMCR is  especially interested in understanding if these technologies could be  used by external auditors.

• Review AS 2510, *Auditing Inventories* (available for download at https://pcaobus.org/Standards/Auditing/Pages/AS2510.aspx 
•  Links to an external site.)
• Do you believe this standard would allow the use of drones and automated counting software? Explain your answer.