Theft of Inventory and Other Assets Flashcards
For the purposes of classifying asset misappropriations, the term larceny is meant
to refer to
the most basic type of inventory theft, the schemes in which an employee simply takes inventory from the company premises without attempting to conceal the theft in the books and records.
The False Sale
The accomplice of the employee-fraudster pretends to buy merchandise, but the employee does not ring up the sale. The accomplice takes the
merchandise without paying for it
Asset Requisitions and Transfers
Asset requisitions and other documents that allow non-cash assets to be moved from one
location in a company to another can be used to facilitate the theft of those assets.
Purchasing and Receiving Schemes
if the assets were intentionally purchased by the
company and later misappropriated by the perpetrator, this is classified as an inventory
larceny scheme. Here the company loses both the value of the merchandise and the use of the merchandise.
Falsifying Incoming Shipments
The copy that is sent to accounts payable indicates receipt of a full shipment so the vendor will be paid without any questions. The copy used for inventory records indicates a short shipment so that the assets on hand will equal the assets in the perpetual inventory.
Instead of marking shipments short, the perpetrator might reject portions of a shipment as not being up to quality specifications. The perpetrator then keeps the “substandard” merchandise rather than sending it back to the supplier.
False Shipments of Inventory and Other Assets
To conceal thefts of inventory and other assets, employees sometimes create false shipping
documents and false sales documents to make it appear that the inventory they take was sold
rather than stolen
Inventory shrinkage is
the unaccounted-for reduction in the company’s inventory that results from theft
Concealing Inventory Shrinkage
Altered Inventory Records
Fictitious Sales and Accounts Receivable
Write-Off of Inventory and Other Assets
Physical Padding
Detection of Inventory Schemes
Statistical Sampling Perpetual Inventory Records Shipping Documents Physical Inventory Counts Analytical Review Computer-Generated Trend Analysis
Other items that may be sampled on a statistical basis include the following:
- Receiving reports
- Perpetual inventory records
- Raw materials requisitions
- Shipping documents
- Job cost sheets
Unexplained entries in the perpetual records might reveal embezzlement losses.
- Are all the reductions to the perpetual inventory records explained by source documents (such as sales invoices, approvals to remove to scrap inventory, or spoilage)?
- Are all increases in perpetual records explained by source documents such as receiving reports?
Inventory theft may be uncovered by answers to questions such as (Shipping Documents ):
- Are all sales properly matched with a shipping document?
- Are any shipping documents not associated with a sale?
- Is inventory disappearing from storage?
The following audit program will also be helpful in establishing inventory control:
• Do adequate, detailed, written inventory instructions and procedures exist? Do inventory
procedures give appropriate consideration to the location and arrangement of
inventories?
• Do inventory procedures give appropriate consideration to identification and description
of inventories?
• Is the method of determining inventory quantities specified (e.g., weight, count)?
• Is the method used for recording items counted adequate (e.g., count sheets,
prenumbered tags)?
• Are inventory tags used? If yes: (1) Are they prenumbered? (2) Is accounting for
inventory tags adequate and does it include control with respect to tags used, unused,
and voided?
• Are adequate procedures in place to identify inventory counted, ensure that all items
have been counted, and prevent double counting?
• Are obsolete, slow-moving, or damaged inventories properly identified and segregated?
• Is the inventory reasonably identifiable for proper classification in the accounting
records (e.g., description, stage of completion)?
• Are inventory counts subject to: (1) complete recounts by persons independent of the
ones involved in the initial counts, (2) recounts only of merchandise having substantial
value, or (3) spot checks by supervisory personnel?
• Are counts performed by employees whose functions are independent of the physical
custody of inventories and record-keeping functions?
• Do proper accounting controls and procedures exist for the exclusion from inventory of
merchandise on-hand that is not property of the client (e.g., customers’ merchandise,
consignments in)?
• Do proper accounting controls and procedures exist for the inclusion in inventory of
merchandise not on-hand, but the property of the client (e.g., merchandise in
warehouses, out on repair, consignments out)?
• Will identical inventory items in various areas be accumulated to allow a tie in total
counts to a summary listing subsequent to the observation?
• Is the movement of inventory adequately controlled (e.g., shipping and receiving
activities suspended) during the physical count to ensure a proper cut-off?
• Are significant differences between physical counts and detailed inventory records
investigated before the accounting and inventory records are adjusted to match the
physical counts?
• Will inventory at remote locations be counted?
• Will special counting procedures or volume conversions be necessary (e.g., items
weighed on scale)?
• How will work-in-process inventory be identified?
• How will the stage of completion of work-in-process inventory be identified?
• Are there any other matters that should be noted for the inventory count?
Prevention of Inventory Schemes
Proper Documentation
Segregation of Duties
Independent Checks
Physical Safeguards
Proper Documentation
The following items should be prenumbered and controlled:
- Requisitions
- Receiving reports
- Perpetual records
- Raw materials requisitions
- Shipping documents
- Job cost sheets
