Innovation mindset

Bryan’s Amazing Animals

Overview

This case focuses on the inventory process. In completing this case, you will learn more about how companies and their auditors perform periodic inventory counts and focus on the innovative practice of using drones and automated counting software to complete the inventory process. The case uses biological assets (sheep) as an example for using drones in counting inventory, but you should consider how drones can be used in other, more traditional inventory counts, such as in a warehouse.

Background

You are an auditor who is tasked with verifying the inventory of Bryan’s Amazing Animals (BAA). BAA owns a sheep farm. The flock of sheep represents an important biological asset (i.e., living plants and animals) of BAA and it is, therefore, important that the company maintains an accurate count of the inventory. Each year, BAA performs an inventory count as it moves the sheep from their winter pasture to their summer pasture. The sheep are not easy to count in this process because there are large numbers of them, they continually move around and they are hard to distinguish from one another. The traditional method of counting the sheep is to have shepherds and dogs herd them through a small gate and then two people count the animals as they pass through (the counters). Click the image below to watch a video that shows the actual process that BAA uses to count the sheep.  

From the video, you will notice that there are two men counting all of the sheep as they run past. The sheep are scared of this process and go through in groups. Each counter tries to be accurate and only count each sheep once; however, as shown in the video, this is a difficult task.

The video you watched required five people working for one hour to perform the counting of the sheep. Thus, it is very time-consuming for BAA. For your audit, one or more auditors would be required to perform the same task, adding more labor to this process.

BAA reported that it sent 3,080 sheep to the winter pasture (these sheep arrived on a truck two months earlier and this count can be considered correct). While in the winter pasture, the shepherds found the carcasses of six sheep (likely killed by predators), and one additional sheep was sick and could not make the trip to the summer pasture. Thus, the shepherds expected 3,073 sheep in their count based on the current inventory records; however, it is possible that other sheep wandered away or were killed by predators and the shepherds were unaware of their disappearance. The two counters initially reported counting 3,081 sheep and 3,063 sheep. After deliberation, they agreed to make the final count 3,070 sheep. BAA management adjusted the accounting inventory records accordingly.

Part I: Imagine better and learn more

Using drone technology and automation to innovate inventory management and for auditing of inventory

Drones are pilotless, radio-controlled aircraft. Nikola Tesla filed for the first patent related to drone technologies in 1898. As he demonstrated to a stunned crowd at the Electrical Exhibition held in Madison Square Garden, radio wave signals could wirelessly control a toy boat from a considerable distance. Since that time, the technology making drones has continued to evolve. The military has invested significant resources in drone technologies, culminating in using a weaponized drone to attack a target in 2002. Drones have expanded beyond electrical shows and the military. They are now used in diverse industries, including journalism and filming, geographic mapping, safety inspections, agriculture, law enforcement, construction and storm forecasting.

Drones are also being considered for use by the business and accounting industry in regard to inventory management and the audit of inventory. EY has launched a global proof of concept to expand the use of drones in inventory observations as part of its digital audit capabilities. In order to enhance audit quality, this extensive pilot project will use pioneering industry technology to improve the accuracy and frequency of the inventory count data collection.

EY will use a cloud-based asset tracking platform, powered by an Internet of Things sensor network, to analyze inventory quantities in real time by reading quick response (QR) codes, bar codes or rack labels and feeding this information directly into EY Canvas — the EY Assurance global audit digital platform that seamlessly connects more than 80,000 auditors.

Drones will initially be used by EY in both the manufacturing and retail sectors. Audits of automotive manufacturers, for example, will use the drones to conduct an automated count of vehicles at manufacturing plants. In retail sector audits, for a warehouse stock count, the drones will work autonomously while using variable image and object recognition tools, such as optical character recognition and QR codes, bar codes or rack labels to collect inventory information, especially during off-hours to minimize audit stakeholder risk and improve efficiency.

The use of drones in the inventory count allows more data to be captured and audit teams to focus on identifying areas of risk, rather than manually capturing stock counts. Innovating the stock count process using groundbreaking drone technology, artificial intelligence and machine learning, can create a capability that can further help EY audit stakeholders.  

While capturing images of the inventory can improve the evidence for the inventory counts, this alone does not necessarily improve the efficiency of the inventory process. Thus, an important complement to capturing images is to automate the identification and counting of the items in the image. To automate the identification of items, several companies have developed automated counting software.

For this case, we recommend using Count Things software. This software uses machine learning to detect specific items in an image. For example, the software developers develop an algorithm to identify a particular type of animal. Because it uses machine learning, the software gets “smarter” as it evaluates more and more images; that is, it becomes better at identifying what it is asked to identify.

At the present time, the software does not perform the count accurately enough for auditing purposes so that the need for the involvement of a human is completely replaced. Rather, human judgment is still needed to review each count and to identify mistakes made by the software. The software usually makes two types of mistakes — overidentifying or underidentifying items. In counting animals, overidentifying is when the software identifies that something is an animal when actually it is not. For example, the software may identify a patch of mud, an animal’s shadow, sagebrush or a fence post as an animal. Underidentifying is when the software misses counting an animal. Careful human review is needed to make sure the final count does not overidentify or underidentify animals. 

Required

BAA is interested in making the inventory count process more efficient and less stressful for the sheep. 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. BAA 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. BAA is especially interested in understanding if these technologies could be used by external auditors.

►    Click the image below to watch a video to learn more about how EY is using drones to help drive the digital audit.

►    When you reimage a process, it is important to understand any regulatory or technical guidance or requirements that need to be considered. Review AS 2510, Auditing Inventories (available for download at https://pcaobus.org/Standards/Auditing/Pages/AS2510.aspx).

–         Do you believe this standard would allow the use of drones and automated counting software? Explain your answer.