m

  
 





 m


 

 
 
 

  
Inventory and Cost of Goods Sold Frauds

Inventory ² includes all the goods a company

owns and holds for sale in the normal course of
operations; it is a merchandiser·s most
important asset.

Cost of Goods sold ² is the entity·s cost of its

inventory that has been sold to customers. It is
the merchandiser·s major expense.
Y
   
  


ë
  
 


  
 
 



 
þeginning Inventory No effect No effect
+ Purchases of inventory No effect Understated
- Returns of inventory to No effect No effect
vendor
- Purchase discounts on No effect No effect
inventory purchases
Goods available for sale No effect Understated
- Ending inventory Overstated No effect
Cost of goods sold Understated Understated
  

 
 
Gross Revenues (sales) No effect
- Sales returns No effect
- Sales discounts No effect
Net Revenues (sales) No effect
- Cost of goods sold Understated
Gross Margin Overstated
- Expenses No effect
Net Income Overstated

Purchase inventory

Return VY
 2 Return merchandise to
supplier
goods?

Take
VY
 3 Pay vendor within
discount? discount period

4 Pay vendor w/o
discount

VY
 5 Sell inventory; recognize
Sell
inventory? cost of goods sold


Inventory VY
 6 Write down inventory
is obsolete?

Inventory 
counted? 7 Estimate inventory

VY

8 count inventory 9 determine inventory costs
Õ 
   

. Purchase inventory ‰Underrecord purchases

‰ record purchases to late (cut-
off problem)
‰ not record purchases
2. Return merchandise to ‰ Overstate returns
supplier ‰ record returns in an earlier
period (cut-off problem)
3. Pay vendor within discount ‰ Overstate discounts
period ‰ Don·t reduce inventory cost

4. Pay vendor without discount ‰Don·t reduce inventory cost

5. Sell inventory; recognize cost
of goods sold
‰ Record purchase and payment
in a later period
‰ Record at too low an amount
‰ Don·t record cost of goods sold
or reduce inventory
Õ


  


6. Write down inventory (it
becomes obsolete)
7. Estimate inventory
8. Count inventory
9. Determine inventory costs
‰ Don·t write off or write down
obsolete inventory
‰ Overestimate inventory
(overestimate ratio, etc)
‰ Overcount inventory (double
counting, etc. )
‰ Use incorrect costs
‰ Make incorrect extensions
‰ Record fictitious inventory







M


 

‰ u
u  u 

 

uu
u  u 

‰ u
u  
 

u
uu  u 

‰ u
u 
u  u u 

u

uu  u u


‰ u
u 
u  

uu u 

  



 


M    


 

‰  u u u u 

u u  
  u   uuu 
u
u 
u u  
u  u


‰  u  u  u u 



u uu 

‰ 
u u u 

        u 

‰ u u   u 

‰ u  

u u u 

u u 
  
 
 u 

u   
M    

  

‰ u   u u



‰  u
   

     u 
u u u uu
u  

‰  u   u u u u   

‰ u u
u u   u   u

‰
u  u u u u u u 

u u u

‰
u  u

 uu 

u  u

‰  u 

‰
u  u uu 

uu 
  

‰  uu   
 u u 




 


ë 
 

‰    uu   u u

  u  
u   u u 


‰  u uu 
u u u

u
u 

‰     u  
u  




 


þ




 

‰   u 
     u



 u 
  u 
u  u 
u  u u  
u u 

‰ u uu      


 u u  u uu uu
   


‰   
u u u 
 

  
u    u 
  u u 
u   



 


þ




 

‰    u
uu    u 

u ! u  u

‰  u 
  u u 

u u u  
uu u 
u 


‰  
uuu 
   u 

   u  
 u u
u  u  uu
 
Ê

 
 

 


‰ `
  
  `    
` `

‰ `   `   `  ` 

`` `   ` `  `
 `  `

`
`  

‰ `     

 `
 
  

  
 `  `   
`
  
  
 
 ` 

   
  `

  `
` 

Ê

 


    


‰      
 ` `   
``
   

‰  
          
``
 

‰ `  `    ` `  `
 ``

`   ``   
 `   `

 
 
` `
 


‰         `   

`
` ``
   
Ê






‰ `   ` 

  ``


`   


‰ `      `` ` 




‰ ` 
 `   
   `     `
Ê



 
 


M 

   ë  
 
 

  
 


   
  
   

. Focus on changes in
. Compare statement
statement numbers results with similar co.
2. Study statement of cash 2. Compare the co.·s trends
flow with those of similar co.
3. Use horizontal analysis

 
  



. Examine changes in
. Compare statement
relevant ratios amounts with the assets
they are supposed to
represent
2. Use vertical analysis
| 

 

  



‰ p  `
  p   ` 

‰ 
 
   
  
`
`



‰    ` `   
 `  `
 
 
!
| 

 

  



‰ `  
 " 
    ` `

 `
  ` ` 

‰ 
` ` 



‰  `
` ` "  `  

 `
  `  `

‰ `
  ` " `  `


`#`
ë



  


  

‰ ``
`
`  

 
$ 

‰ 
 
 
 ` 
 
``
    ` `   
  `

‰  `

 
 `  `
 `    
 ` 
 `
  
 

‰  `  `   

`  `   ` `
ë


  




 

‰ $   `     `
wONG TERM ASSETS FRAUD

wong term assets ² are assets other than current

assets. One category of long-term assets is plant
assets (also called fixed assets).

Other categories of long-term assets include long-

term investments and other assets.
Improper Capitalizing or Expensing

‰Start-up companies often overstate assets by capitalizing

as intangible assets such things as start-up or pre-operation
costs, advertising costs, research and development,
marketing costs, certain salaries and other initial costs

‰Capitalizing costs that should be expensed increases net

income by the same amount of the capitalized cost.
Overstating fixed assets

Inflated amounts are recorded in non-arm͛s=length
purchase transactions

2
ssets are not written down to appropriate book,

market or residual values because insufficient
depreciation is recorded, they are obsolete, or their
values are otherwise impaired

3 onexistent assets are recorded in statement accounts

Analytical Symptoms

‰Total fixed assets / total assets

‰Individual fixed asset account balances / total fixed assets

‰Total fixed assets / long term debt

‰Depreciation expense for various categories of assets / assets

being depreciated

‰Accumulated depreciation / depreciable assets (per asset

category)
Accounting or Documentary Symptoms

‰Were there appraisals of purchased fixed assets?

‰Were the purchase transaction recorded near year-end?

‰Did the transactions involve exchanges of assets or a purchase of

assets?

‰Are the assets purchased assets that this company would

normally purchase or are they tangential to the business?

‰Are there inconsistencies in the documentation?

‰Are the assets recorded on your client·s books at the same or

lower amounts as on the seller·s books?