Question

Review the Journal of Accountancy Article: Ghost Goods: How to Spot Phantom Inventory and answer the following questions:

1. Why, from your perspective, is inventory so easy to inflate without auditor detection?
2. Does overstated inventory affect just the balance sheet? Explain how it affects the balance sheet and any other financial statements.
3. Why do you think Mickey Monus got away with his scheme for so long?  

Answer 1

Phantom inventory is inventory reported that does not exist.

1. Leveraging mystery shoppers to report on shelf-level conditions
2. Comparing on-shelf availability to perpetual inventory
3. Backtracking phantom inventory’s path to the shelf to identify the cause of the problem

In my perspective, Inventory is so easy to inflate without auditor deduction by not accounting the purchase invoice. In other way its understating the liability (amount payable to purchase invoices)

Overstated inventory will affect both P&L and balance sheet. in P&L it will effect cost of goods sold and which is effect in more profit. In Balance sheet over stating of inventory will result in over stating of assets (inventory) and under statement of Liability(Supplier invoice un accounted)

Mickey Monus got away with his scheme for so long because

1. The lack of adequate management information systems

2. Lack of internal controls

3. Poor audit function

4. un sustainable business model

these are the main reasons.