--- title: Navigating Tariffs and Their Impact to Inventory Valuations description: Recent changes in the U.S. trade policy, particularly tariffs on imported goods, are creating new inventory and audit challenges for businesses. Companies that rely heavily on imported goods should be aware of how these changes may impact their financial reporting and audit readiness. image: https://blog.sweeneyconrad.com/hubfs/Inventory-1.jpeg --- [![Sweeney Conrad](https://blog.sweeneyconrad.com/hs-fs/hubfs/raw_assets/public/SweeneyConrad_August2022/images/Sweeney-Conrad-logo.jpg?width=542&height=48&name=Sweeney-Conrad-logo.jpg "Sweeney Conrad")](https://www.sweeneyconrad.com/preview/) ![navigation menu](https://blog.sweeneyconrad.com/hubfs/raw_assets/public/SweeneyConrad_August2022/images/hamburger-bars.png) - [What We Do](https://www.sweeneyconrad.com/what-we-do) - [Tax Services](https://www.sweeneyconrad.com/what-we-do/tax-services) - [Client Accounting Services](https://www.sweeneyconrad.com/what-we-do/client-accounting-services) - [Advisory Services](https://www.sweeneyconrad.com/what-we-do/advisory-services) - [How We Do It](https://www.sweeneyconrad.com/how-we-do-it) - [Our Process](https://www.sweeneyconrad.com/how-we-do-it/our-process) - 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These tariffs are increasing the cost of raw materials, components, and finished goods, which directly affects how inventory is valued and reported.  How Are Tariffs Increasing Inventory and Audit Challenges?  Under accounting standards (ASC 330), inventory must be recorded at the lower of cost or net realizable value (NRV). When tariffs raise the cost of goods, but market prices remain flat or decline, businesses may need to write down inventory. This can lead to financial reporting issues and increase the risk of errors in financial statements.  In industries with fast product cycles, such as technology and consumer goods, inventory can quickly become outdated or overvalued. Companies that rely heavily on imported goods should be aware of how these changes may impact their financial reporting and audit readiness.  Costing and Documentation Are More Important Than Ever  Tariffs are also affecting how companies allocate overhead costs. When material costs rise, businesses often adjust their cost accounting models. If these changes aren’t properly documented or calculated, inventory values may be overstated.  Auditors are paying closer attention to: - How companies calculate the cost of goods sold (COGS)  - Whether overhead costs are being allocated correctly  - The accuracy of assumptions used in inventory valuation  - Evidence supporting markdowns and pricing strategies  Inventory levels across many industries remain high heading into year-end. This is partly due to companies ordering more earlier in the year to avoid future tariff increases or supply chain delays. While this may have been a strategic move, it increases the risk of carrying excess or obsolete inventory.  Businesses should ensure they have clear documentation for their costing methods and inventory decisions. This includes support for any markdowns, changes in pricing, or adjustments to overhead allocation. Proper documentation helps reduce the risk of misstatements and supports compliance with audit standards such as AU-C Section 501, which outlines requirements for audit evidence related to inventory.  What to Expect During Upcoming Audits  As audit season approaches, inventory will continue to be a focus area, especially for companies with global supply chains. Auditors are expected to take a closer look at how tariffs are affecting inventory valuation and financial disclosures.  Key areas of focus include:  - Use of external specialists to review complex costing models  - Detailed testing of inventory values, including post-year-end sales trends  - Review of disclosures related to risks and uncertainties (ASC 275)  Companies should be prepared to explain how tariffs have impacted their financials and ensure that any risks are clearly disclosed. Accurate documentation and proactive planning can help reduce audit delays and avoid surprises.  In addition, businesses may be asked to provide more detailed support for their inventory valuation decisions, especially if they are carrying high levels of stock or have made significant changes to their pricing strategies. Auditors will be looking for consistency, transparency, and reasonable assumptions in how inventory is valued and reported.  Need Support?  If your business is affected by recent tariff changes or you’re preparing for year-end audits, now is the time to review your inventory valuation and costing practices. Having the right documentation and processes in place can help ensure your financial reporting is accurate and audit-ready.  Our team is available to help you navigate these changes and prepare for a smooth audit season. 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