Chapter 14
Inventory Fraud
You are probably asking at this point: why have we chosen to devote an entire chapter to fraud as it occurs with inventory? The answer is simply because there isn't just one distinct core business system that presents the opportunity for fraud involving inventory. Inventory fraud can occur in just one core system or several concurrently. We have found fraud scenarios that pertain to the theft and misuse of the assets comprising inventory and fraud scenarios that involve the valuation of the inventory where it is misrepresented in the financial reporting. Of course, there are the scenarios where any combinations of systems are affected. Yes, this is a case of a multiheaded monster. But don't worry thinking it will take a Herculean effort to detect the fraud scenarios. Remember, we have the tools and knowledge, so for inventory fraud we are not interested primarily in the “why,” “when,” or “who” of the fraudulent act, but rather the “how.” Are the assets being used in the intended manner? If not, then how are they being misused? Are the assets there? If not, then how are they being stolen? Does the inventory value as reflected on the financial statements have meaning? If not, then how was that value misrepresented?
You may think that this type of fraudulent activity would occur most frequently at businesses with large and diverse inventories, thereby allowing the perpetrator to easily conceal any theft. However, how many times in your auditing life have ...
