INVENTORY AND OTHER ASSETS PAST PAPERS WITH ANSWERS

QUESTION 1 : Which of the following is NOT a method that is used to conceal inventory shrinkage?

  1. Selling merchandise without recording the sale
  2. Writing off stolen inventory as scrap
  3. Placing empty boxes on warehouse shelves
  4. Performing a forced reconciliation of the inventory records

Some fraudsters try to make it appear that there are more assets present in the warehouse or stockroom than there actually are by physically padding the inventory. In one case, employees stole liquor from their stockroom and restacked the containers for the missing merchandise. This made it appear that the missing inventory was present when in fact there were really empty boxes on the stockroom shelves. Another method would be to fill boxes with bricks or other inexpensive materials and stack the boxes on warehouse shelves. One of the simplest methods for concealing shrinkage is to decrease the perpetual inventory record so that it matches the physical inventory count. This is also known as a forced reconciliation of the account. Basically, the perpetrator just changes the numbers in the perpetual inventory to make them match the amount of inventory on Writing off inventory as obsolete, damaged, or unsellable is also a relatively common way for fraudsters to remove assets from the books before or after they are stolen. This is beneficial to the fraudster because it eliminates the problem of shrinkage that inherently exists in every case of noncash asset misappropriation. Selling merchandise without recording the sale would actually increase the amount of shrinkage on a company’s books because the physical inventory would be depleted without a corresponding adjustment to the perpetual

 

QUESTION 2 : The person who is responsible for the shipment of inventory should also be responsible for the conversion of inventory to scrap.

  1. True
  2. False

Separation of duties is among the measures commonly used to prevent inventory theft. The following duties should be handled by different personnel: Requisition of inventory Receipt of inventory Disbursement/shipment of inventory Conversion of inventory to scrap Receipt of proceeds from disposal of scrap

 

QUESTION 3 : An analytical review reveals that Rollins Company’s cost of goods sold increased by 80% last year. Its sales, however, only increased by 40%. What might this discrepancy indicate?

  1. Sales were unusually poor this year versus last year.
  2. There were more sales returns this year than in the prior year.
  3. Inventory has been depleted by theft.
  4. The quantity of items purchased decreased.

Inventory fraud might be detected by using an analytical review because certain trends become immediately clear. For example, sales and cost of goods sold should move together since they are directly related. However, if the cost of goods sold increases by a disproportionate amount relative to sales, and no changes occur in the purchase prices, quantities purchased, or quality of products purchased, the cause of the disproportionate increase in cost of goods sold might be one of three things: (1) ending inventory has been depleted by theft, (2) someone has been embezzling money through a false billing scheme, or (3) someone has been skimming sales revenue.

 

QUESTION 4 : Jackson is a receiving clerk at a warehouse. His job is to count the number of units in incoming shipments, record the figures in receiving reports, and forward copies of the reports to the accounts payable department. One day, Jackson received a box of 20 laptop computers at the warehouse. His wife’s computer just broke, so he stole one of the computers from the box. To conceal his scheme, Jackson sent a receiving report to accounts payable that 20 computers arrived, but he only recorded 19 on the copy of the receiving report used for the inventory records. What

  1. A noncash larceny scheme
  2. A purchasing and receiving scheme
  3. An asset transfer scheme
  4. None of the above

One of the most common examples of an employee abusing the purchasing and receiving functions occurs when a person charged with receiving goods on the victim company’s behalf—such as a warehouse supervisor or receiving clerk—falsifies the records of incoming shipments. If, for example, 1,000 units of a particular item are received, the perpetrator indicates that only 900 were received. By marking the shipment short, the perpetrator can steal the 100 The obvious problem with this kind of scheme is the fact that the receiving report does not match the vendor’s invoice, which will likely cause a problem with payment. Some employees avoid this problem by altering only one copy of the receiving report. 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.

 

QUESTION 5 : The warehouse supervisor at South Corp. has stolen $50,000 worth of inventory over the last year. He has made no effort to conceal his theft in any of the inventory records. During an analytical review of the financial statements, which of the following red flags might South Corp.’s auditors find that would indicate the inventory theft?

  1. Sales and cost of goods sold moved together.
  2. The percentage change in sales was significantly higher than the percentage change in cost of goods sold.
  3. The percentage change in cost of goods sold was significantly higher than the percentage change in sales.
  4. None of the above

possible outcomes would indicate inventory theft. Inventory fraud might be detected by using an analytical review because certain trends become immediately clear. For example, sales and cost of goods sold should move together since they are directly related. However, if the cost of goods sold increases by a disproportionate amount relative to sales, and no changes occur in the purchase prices, quantities purchased, or quality of products purchased, the cause of the disproportionate increase in cost of goods sold might be one of three things: (1) ending inventory has been depleted by theft, (2) someone has been embezzling money through a false billing scheme, or (3) someone has been skimming sales revenue.

 

QUESTION 6 : Which of the following is NOT a method that a fraudster might use to conceal inventory shrinkage?

  1. Falsely increasing the perpetual inventory figure
  2. Writing off stolen inventory as scrap
  3. Altering the perpetual inventory records to decrease the balance
  4. Physical padding of inventory

Altering the perpetual inventory figure is one method that can be used to conceal inventory shrinkage. However, increasing the perpetual inventory record would only worsen the shrinkage problem. Instead, a fraudster should falsely decrease the perpetual inventory record to match the lower physical inventory count. Alternatively, some employees try to make it appear that there are more assets present in the warehouse or stockroom than there actually are. Empty boxes or boxes filled with bricks or other inexpensive materials, for example, might be stacked on shelves to create the illusion of extra inventory. This is known as physical padding of Fraudulently writing off stolen inventory as scrap is also a relatively common way to remove assets from the books before or after they are stolen. This is beneficial to the fraudster because it eliminates the problem of shrinkage that inherently exists in every case of noncash asset misappropriation. One of the simplest methods for concealing shrinkage is to alter the perpetual inventory record so that it matches the physical inventory count. This is also known as a forced reconciliation of the account. In the case of misappropriated inventory, the physical count would be lower than the perpetual records

 

QUESTION 7 : Which of the following is a method that would help prevent the theft of company inventory?

  1. Separating the duties of handling incoming shipments and filling out the inventory requisition form
  2. Restricting inventory access to authorized personnel
  3. Using prenumbered shipping documents, perpetual inventory records, and inventory receiving reports
  4. All of the above

There are four basic measures that might help prevent inventory fraud, if properly installed and implemented. They are proper documentation, separation of duties (including approvals), independent checks, and physical safeguards. The following duties should be handled by different personnel: Requisition of inventory Receipt of inventory Disbursement of inventory Conversion of inventory to scrap Receipt of proceeds from disposal of scrap In addition, all merchandise should be physically guarded and locked; access should be limited to authorized personnel only. Finally, the following documents should be prenumbered and controlled: Requisitions Receiving reports Perpetual records Raw materials requisitions Shipping documents Job cost sheets

 

QUESTION 8 : Which of the following is considered misuse of a noncash asset?

  1. Olivia had access to a company vehicle while on an out-of-town assignment. She used the vehicle to run some personal errands after she was finished with work for the day, but she provided false written and oral information regarding the nature of her use of the vehicle.
  2. Mike works for a lawn care service. One of his customers lives on his street. After Mike finishes mowing the customer’s lawn, he uses his employer’s lawnmower to mow his own lawn.
  3. Lisa is a paralegal, but she also works as a personal fitness trainer on the weekends. She stays after work at the law office one day to print off invoices for her personal training clients.
  4. All of the above are considered misuses of noncash assets.

There are basically two ways a person can misappropriate a company asset. The asset can be misused (or “borrowed”) or it can be stolen . Assets that are misused but not stolen typically include company vehicles, supplies, computers, and other office equipment. For example, suppose an employee made personal use of a company vehicle while on an out-of-town assignment. The employee provided false information, both written and verbal, regarding the nature of his use of the vehicle. The vehicle was returned unharmed and the cost to the perpetrator’s company was only a few hundred dollars.

 

QUESTION 9 : Jessica worked at the cash register of a department store. Her friend Molly came to the store one day to help Jessica steal a watch she wanted but couldn’t afford. Molly took the watch to Jessica’s register and, instead of charging Molly for it, Jessica rang a “no sale” on the register. Molly pretended to give Jessica cash to make it look like she was paying for the watch. Molly then took the watch out of the store and later gave it to Jessica. What type of scheme did

  1. A false sale scheme
  2. A skimming scheme
  3. A purchasing and receiving scheme
  4. A register disbursement scheme

In many cases, corrupt employees use outside accomplices to help steal inventory. The false, or fake, sale is one method that depends upon an accomplice. Like most inventory thefts, the fake sale is not complicated. The employee-fraudster’s accomplice pretends to buy merchandise, but the employee does not ring up the sale. The accomplice then takes the merchandise without paying for it. To a casual observer, it will appear that the transaction is a normal sale. The employee bags the merchandise and might act as though a transaction is being entered on the register when in fact the “sale” is not recorded. The accomplice might even pass a nominal amount of money to the employee to complete the illusion.

 

QUESTION 10 : Sales and cost of goods sold almost always move together, unless there have been changes in purchase prices, quantities purchased, or quality of products being purchased.

  1. True
  2. False

Inventory fraud might be detected by using an analytical review because certain trends become immediately clear. For example, sales and cost of goods sold should move together since they are directly related. However, if the cost of goods sold increases by a disproportionate amount relative to sales, and no changes occur in the purchase prices, quantities purchased, or quality of products purchased, the cause of the disproportionate increase in cost of goods sold might be one of three things: (1) ending inventory has been depleted by theft, (2) someone has been embezzling money through a false billing scheme, or (3) someone has been skimming sales revenue

 

QUESTION 11 : Both falsely increasing the perpetual inventory balance and failing to reconcile inventory records are ways a fraudster might conceal inventory shrinkage.

  1. True
  2. False

Falsely increasing the perpetual inventory record would only worsen the shrinkage problem. Instead, a fraudster seeking to conceal shrinkage would falsely decrease the perpetual inventory record to match the lower physical inventory count. In addition, failing to reconcile inventory records would likely cause more suspicion to arise. One of the simplest methods for concealing shrinkage is to change the perpetual inventory record so that it matches the physical inventory count. This is also known as a forced reconciliation of the account. The perpetrator simply changes the numbers in the perpetual inventory to make them match the amount of inventory on hand. For example, the employee might credit (decrease) the perpetual inventory and debit (increase) the cost of sales account to lower the perpetual inventory numbers so that they match the actual inventory count. Instead of using correct entries to adjust the perpetual inventory, some employees simply delete or cover up the correct totals and enter new numbers.

 

QUESTION 12 : ___________________ is the unaccounted-for reduction in a company’s inventory that results from error or theft.

  1. Shrinkage
  2. Defalcation
  3. Depreciation
  4. Shortness

Inventory shrinkage is the unaccounted-for reduction in the company’s inventory that results from error or theft. For instance, assume a computer retailer has 1,000 computers in stock. After work one day, an employee loads ten computers into a truck and takes them home. Now the company only has 990 computers, but since there is no record that the employee took ten computers, the inventory records still show 1,000 units on hand. The company has experienced inventory shrinkage in the amount of ten computers.

 

QUESTION 13 : Of the following, who should conduct physical observations of a company’s inventory in order to most effectively prevent inventory theft?

  1. Sales representative
  2. Purchasing agents
  3. Purchasing supervisor
  4. Warehouse personnel

Someone independent of the purchasing or warehousing functions should conduct physical observation of inventory. For example, sales representatives usually communicate with customers and encourage them to buy the company’s products, but they typically have no access to the physical inventory. The personnel conducting the physical observations also should be knowledgeable about the inventory.

 

QUESTION 14 : Unauthorized personal use of a company vehicle constitutes misuse of a noncash asset, a form of asset misappropriation.

  1. True
  2. False

There are basically two ways a person can misappropriate a company asset. The asset can be misused (or “borrowed”) or it can be stolen . Assets that are misused but not stolen typically include company vehicles, supplies, computers, and other office equipment.

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