A merchandising company has asked you to advise it on how to detect fraudulent financial reporting. Management wants your help in detecting inventory overstatement. Further, management wants to know how to find evidence of inventory overstatement.
a. Using your own numbers, make up an example to show management the effect of overstating inventory. Show how inventory overstatement at the end of Year 1 carries through to the beginning inventory overstatement in Year 2.
b. Prepare a brief report to management suggesting ways management could detect inventory overstatement.