Amanda started a new job as an accountant at a sunglass company. The company manufactures and purchases sunglasses before shipping them out to major retail firms for sales deliveries.

This month, Amanda became acclimated to the different types of inventory, including the finished goods (completed sunglasses), raw materials (lenses, frames, temples, packaging), and work in process (goods still in the assembly phase). She implemented a new cycle count process in which certain accounting employees would go to the warehouse at the end of the month to randomly count inventory. This is to ensure that the counts matched up with the perpetual inventory balances on her books.

For the first count, three cycle counters entered their items counted and compared them to the system. Seven of the products counted appeared to show low values as compared to the accounting system records. Further, they were being valued at prices that didn’t correspond to the system costs. A few of the products showed quantity, but the product was not physically on the shelves. In addition to these issues, Amanda noticed that sales last quarter had higher profit margins than normal but the amount of volume was the same. She looked at the costs of goods sold and noticed an overall reduction. Another issue she noticed is that sales were made with large inventories, but the system showed no recent product receipts on the items. This finding alarmed her, and she wondered if these sales were even valid.

Respond to the following questions:

1. 1. What types of fraud occurred in this situation?
2. 2. If you were Amanda, what would you have done to stop this type of fraud in the future? For instance, do you recommend new processes, different controls, etc? Explain.
3. 3. What are the major issues you see in terms of internal control violations, and how does this relate to our studies this week?

Answer rating: 100% (QA)

Types of fraud occurred in this situation Based on the information provided several types of fraud can be identified a Inventory theft or shrinkage The low values of certain products in the cycle coun... View the full answer