You keep looking over the financial statement to see where your analysis is going wrong, but you can’t see any problems—it just looks like inventory is getting larger and larger, but you know that you haven’t seen growth in the actual levels of inventory that the financials seems to be indicating. You just finished a comprehensive audit of all the physical controls of inventory, so you doubt that inventory is being stolen. Everything else in the financials seems to look fine. In fact, they seem to indicate that the company is improving in profitability.
1. What might be a valid reason for the increase in inventory cost?
2. Assuming that fraud is being committed, how could a fraud perpetrator commit this type of fraud?
3. What could be done to prevent this type of fraud?