ACC571Case Response 5-Case 51

ACC571Case Response 5-Case 51 - Case Response 5 Case...

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Case Response 5 1 Case Response 5: Chapter 10 - Case 51 Strayer University
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Case Response 5 2 Case Response 5: Chapter 10 - Case 51 If You Are Brought in as Sandra’s Outside Forensic Accountant, What Advice Would You Give Her? The most common form of inventory fraud by employees is theft, which fraudsters perpetrate through several methods. Primary among them is larceny. Wells (2007) defined larceny as “the basic type of inventory theft, the schemes in which an employee simply takes inventory from the company premises without attempting to conceal it in the books and records” (p. 523). Other inventory theft schemes, for example, include hiding theft by manipulation of inventory records, by recording a fictitious sale of the stolen item, or by stealing the purchased item before it is recorded in inventory records (Worrells, 2010). One common factor in these schemes is the theft of the item and its removal from the business’s premises for personal use or for resale. Inventory theft can lead to more than just financial losses. It can also create corporate compliance issues under the Sarbanes-Oxley Act (SOX) and other laws, regulations and accounting standards (Hopwood, Leiner, & Young, 2008). Companies have to take account of inventory theft. In this case, Tenkey Book Company should take several steps to discover the possible ongoing inventory theft and prevent it in the future. Some advices on detecting and preventing inventory theft include the following categories. 1. Warning signs of inventory theft. 2. Ways to detect inventory theft. 3. Ways to prevent inventory theft. Warning Signs of Inventory Theft
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Case Response 5 3 Assess the risk of inventory theft should occur prior to investigation. In addition to large discrepancies between regular physical counts of inventory and perpetual inventory records, according to Berkowitz (2003) and Merklin (2004), some early warning signs that inventory theft may exist include: 1. Unexpected or unexplained shortages or fluctuation in inventory accounts. 2. Excessive or unusually large adjustments to counts after a physical inventory. 3. Significant, unexplained increases in cost of goods sold. 4. Significant decreases in gross profit margins. 5. Unusual or late journal entries to inventory records. 6. Increased write-offs for obsolescent or spoiled goods. 7. Key inventory ratios substantially different from prior periods and industry norms. 8. Shipping documents without corresponding sales documentation. Objective analysis can expose these symptoms. Three ratios in particular ─ age of inventory, gross profit margins and inventory turnover ─ are revealing and should be calculated in detail regularly and in different quarters (Merklin, 2004). However, these symptoms don’t necessarily indicate theft, because it may indicate just faulty record keeping which is fairly common in inventory area. Ways to Detect Inventory Theft
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ACC571Case Response 5-Case 51 - Case Response 5 Case...

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