The importance and ways to track inventory-related fraud symptoms

Inventory affects both the income statement and the balance sheet of the business. Closing
inventory is deducted from the opening inventory and the inventory purchased to determine
the cost of goods sold and thus affecting the income statement.

If there is any fraud related to the inventory, then it will affect the cost of goods sold, gross
profit, and net income on the income statement. Inventory recorded on the assets side of
the balance sheet and the net income in the retained earnings will also get affected by the
inventory fraud.

Inventory fraud can be done in order to overstate the income, achieve the goals, meet bank
covenants, increase the value of the company, hide the theft of inventory, etc. Therefore, it
is very important to track inventory-related fraud symptoms.

Inventory-related fraud can be generally found in the following accounts:

 Inventory
 Accounts payable
 Cash
 Cost of goods sold
 Inventory shrinkage

Therefore, these accounts are tracked in order to determine any inventory-related fraud by
identifying following the inventory-related fraud exposures:

 Double counting
 Bill-and-hold sales
 Consigned inventory
 Cut-off problems
 Overestimating problems
 Capitalizing costs that should be expensed

Ways to track inventory-related symptoms are:

 Control symptoms: It can be tracked by looking a weak control over

1. Receiving,
2. Storage,
3. Shipping,
4. Purchasing process, and
5. Physical observation of inventory.
 Analytical symptoms: It can be tracked by seeing the changes in

1. Record balances from period to period,

2. Comparing information with other companies, and
3. Assets represented should be compared with the amounts.

 Behavioral symptoms: It can be tracked by determining the difference between the

observations and results derived from the inquiry of the management.