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Question 56

During an audit of a retail organization, an internal auditor found a scheme in which the warehouse director and the purchasing agent diverted approximately

$500,000 of goods to their own warehouse, then sold the goods to third parties. The fraud was not found earlier since the warehouse director updated the perpetual inventory records and then forwarded receiving reports to the accounts payable department for processing. Which of the following procedures would have most likely led to the discovery of the missing materials and the fraud?

Select a random sample of receiving reports and trace to the recording in the perpetual inventory records. Note differences and investigate by type of product.

Select a random sample of purchase orders and trace to receiving reports and to the records in the accounts payable department.

Take an annual physical inventory, reconciling amounts with the perpetual inventory records. Note the pattern of differences and investigate.

Select a random sample of sales invoices and trace to the perpetual inventory records to see if inventory was on hand. Investigate any differences.

Correct Answer: C

Conducting an annual physical inventory and reconciling the amounts with the perpetual inventory records would most likely reveal discrepancies between recorded and actual inventory levels. This procedure would highlight the difference between what the records show as being in stock and what is actually in the warehouse, which would point to missing materials and possible fraud. Detected discrepancies should then be analyzed to identify any patterns of differences, guiding further investigation into potential fraudulent activities.

Discussion

balqis32Option: C

Detecting fraud is less favored with random sampling

John1237Option: C

C because the warehouse director only updated (he didn’t falsified the perpetual inventory records and the receiving reports). Otherwise, there would have been no difference between theoretical and physical inventories.