After observing a physical inventory, an auditor compared the physical inventory counts with the perpetual inventory records and noted apparent shortages that were materially larger than those found at the end of the previous year.

Required:

1. Identify possible causes, other than theft, for the differences between the physical counts and the perpetual inventory records.

2. Briefly describe potential adverse effects the differences could cause.

3. Assuming that theft caused the differences, give recommendations to prevent theft.