Prepare for Takeoff: Improving Asset Measurement and Audit Quality with Drone-Enabled Inventory Audit Procedures

Abstract

Auditors increasingly employ technologies to improve audit quality. Using a design science approach, we examine whether using drones and automated counting software can improve audit quality and thereby improve financial reporting. We assess three dimensions of audit quality—efficiency, effectiveness, and quality of audit documentation. We provide evidence that auditors can perform inventory counts with these technologies much more efficiently than they can with manual techniques, decreasing count time in our study from 681 hours to 19 hours. At the same time, auditors can maintain or improve audit effectiveness with these technologies, decreasing error rates in our study from 0.15% to 0.03%, while providing higher-quality audit documentation. Interviews with national-level partners and audit standard setters highlight impediments to adopting these technologies, including firm concerns about being first movers combined with inability of standard setters to provide guidance at a pace that matches the pace of technological development. Collectively, our results suggest that technology-enabled inventory audits can improve audit quality, and further regulatory guidance on using such technologies would enhance adoption.

Keywords: Drones, Automated Software, Inventory Counting, Inventory, Design Science

JEL Classification: M4, M40, M41, M42, M49, O30, O31