Question

If appropriate, include personal experience in your response. Inventory accounting is a good place for fraudulent behavior. Think about the accounting principles and practices related to inventory and list one way that fraudulent behavior might take place. Be very specific. Create one way to reduce the risk of this fraudulent behavior in the business.

Answer 1

D н A B C 1 Measurement of Inventory 3 It should be valued at lower of cost and net realisable value, 4 wherein 5 Cost means cost of purchases, costs of conversion and other costs incurred to bring the inventory to its present location and condition. 6 Net realisable value is the average estimated selling cost subtracted by other costs required to bring the sale. 8 Cost of inventory should not include 11. 1 abnormal amount of wasted material, labour and other production costs. 2 Storage cost 3 Administrative Overheads 4 Selling and Distribution Costs 2 13 15 Cost Formulas 6 17 Though there are several methods to value the inventory, but following are the widely used methods in the industry - 18 1 First-in-First-Out (FIFO) 19 2 Last-in-First-Out (LIFO) 20 3 Weighted Average Cost

21 22 Inventory Fraud 23 24 25 Inventory is determined on the basis of two factors - quantity and price. Keeping in mind the frequent shuffling of goods over 26 several locations, the inventory count can not give a true picture, and employees use this loophole in their favour. They pilferage 27 the goods in smaller quantities, which does not come in management picture, resulting in undervaluation of the inventory. 31 32 Inventory Fraud Solution 33 34 35 Management and auditor needs to play an active role to prevent this fraud. Management should levy stringent controls to ensure 36 that no goods are leaving the place without its entry being made in the system and auditor should set its materiality level to low 37 level so as cover wider population in the sample selected. Any deviations from the control should be strictly adhered to. 41