Fraud Audit Program: Inventory
Inventory Concealment Techniques
False counts. The management team records improper counts. If this procedure is performed, it is most likely to occur on inventory perceived less likely to be counted or with a planned reason for the false count. In this way, the auditor will view the false count as an intentional error versus an intentional plan to misstate the inventory. The auditor needs to ensure that management has no record of the test counts.
Fictitious inventory. Management will use their business environment to create the illusion of inventory by placing empty boxes in the warehouse or creating a reason why inventory cannot be physically inspected. The reasons will vary; however, the intent is always the same. Management will need to inhibit the auditor's ability to physically inspect the item.
In this scheme the item does not exist, the item is incomplete, or some item will be represented as the inventory.
Partially fictitious inventory. The auditor is presented some item to provide the illusion that the inventory does exist. Oftentimes the inventory item will be of a technical nature, which makes it difficult to understand whether the item is in fact a true item.
False certifications. In this scheme, management creates documents certifying inventory balances, alters the original documents, provides copies of documents or draft documents, or has the outside expert provide false documents supporting the inventory item.