Auditor's responsibility for obsolescence;

              THE AUDITOR'S RESPONSIBILITY
FOR OBSOLESCENCE
Lyman W. Oehring, Jr.
Detroit
ONE OF THE most perplexing financial problems confronting the
business world today is the continual increase in the level of
inventories. It can be observed in the financial statements of clients,
in published reports generally, and almost daily in newspaper
articles. Congress has made the inventory prob-lem
in the automotive industry the subject of an
investigation. A portion of the dollar increase in
inventories can be attributed to the increased
costs of production resulting from the continuous
increases in wages and fringe benefits. Competi-tion
and consumers' desires, however, have been
the major factors increasing the inventory level.
The public has become increasingly style con-scious
and has demanded more models, styles,
and colors of almost everything it buys. Com-petition
has forced sellers to have their products in these different
combinations available because a consumer ready to buy does not
want to wait.
As advisers to business, accountants as professional people and
we as a firm have been continually working with business to deter-mine
and maintain the most efficient inventory levels. However,
it is not the purpose of this article to pursue the accountant's efforts
in this area. Rather it is to look at the problems that confront the
auditor in forming an opinion on the fairness of a client's financial
statements. It is in this area that the auditor is presented with the
question of inventory obsolescence.
Obsolescence is defined in part in Kohler's Dictionary for
Accountants as "the loss in usefulness of an asset, occasioned by the
approach to the stage of economic uselessness through progress of
the arts; economic inutility arising from external causes. Obso-lescence
refers to disappearing usefulness resulting from invention,
change of style, legislation, or other causes having no physical rela-tion
to the object affected." Although cost is the primary basis for
the accounting for inventories, it is generally recognized that we
must depart from cost when we are confronted by obsolescence.
Accounting Research Bulletin No. 43 states in Chapter 4, Statement
5, that "a departure from the cost basis of pricing the inventory
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