January 13, 2005 -- A new technology called radio frequency identification (RFID) has been developed that may impact the way CPA firms audit.  The RFID technology is most widely used in E-Z passes and Exxon/Mobil’s speed passes.  In these examples, the consumer holds an item that electronically transmits a signal that collects the consumer’s usage information, whether for collecting tolls or paying for gas, and keeps track of activity for billing purposes.  The sales of the RFID system grew 37% in 2004 and is expected to increase in 2005.  Many companies are now using this RFID technology for inventory management purposes.  Walmart and the U.S. Department of Defense are requiring that their suppliers begin using the RFID system by 2005.

Companies that implement the RFID system for inventory management purposes will have access to accurate inventory information on a more timely basis. Some of the most significant benefits that a company would receive are as follows.

·      The system may influence inventory-costing.  Instead of using FIFO or LIFO, the system will store actual-cost data for each individual inventory item and will be able to determine the ending inventory levels as well as costs of goods sold.

·      Inventory management will be more efficient.  Most physical inventories occur once a year.  Once an RFID system is in place, physical inventories could be instantaneous.

·      The system will be able to identify slow moving or obsolete items.

Due to the evident and potential impact of this new technology, CPA’s must become more familiar with the RFID system in order to provide clients with proper audit and/or consulting services.  Two important audit issues relating to the RFID system are how effective the system will be and to understand the underlying controls in place to ensure accurate information for items in inventory.  In reference to consulting, CPA firms will benefit by designing return on investment plans for their clients.  As a result, the CPA firm can estimate savings or other potential advantages for their clients.

The RFID system will provide great benefits to clients and change the way CPA firms audit inventory. One drawback of the system is that it will create voluminous amounts of data that will need to be processed by clients, as well as by auditors.  Another issue is whether or not the system invades consumer privacy since it can provide information about the individuals that may be purchasing an item.

In conclusion, the RFID system has stirred the interest of many companies.  So what does this mean for auditors?  Auditors must gain an understanding of how the system works and what the limitations of the system might be. Auditors will also have to verify if information produced from the system is accurate and that items listed on the system are actually there. The RFID system can make the physical inventory observation a lot easier and drive auditors to understand the system and the clients internal controls over the system, which will help CPA firms better serve their clients.

For more information, contact your Asher accounting and auditing professional at 215-564-1900 .

Back to News Archive