Chapter 9: Inventory and Other Assets

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Chapter 9: Inventory and Other Assets. Non-Cash Schemes. Only 13% of asset misappropriation schemes targeted non-cash assets. The median loss in non-cash schemes was $100,000, which is higher than the median loss in cash schemes ($60,000). Theft of Non-Cash Assets – Breakdown of Cases.
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Chapter 9: Inventory and Other AssetsNon-Cash Schemes
  • Only 13% of asset misappropriation schemes targeted non-cash assets.
  • The median loss in non-cash schemes was $100,000, which is higher than the median loss in cash schemes ($60,000)
  • Theft of Non-Cash Assets – Breakdown of CasesThe “other” category is primarily schemes targeting intangible assets (e.g., trade secrets).Theft of Non-Cash Assets -Median LossesWhat is Inventory Fraud?
  • Misuse of non-cash assets
  • Misappropriation of non-cash assets
  • Larceny
  • Asset requisitions and transfers
  • Purchasing and receiving schemes
  • False shipments
  • Misuse of Company Assets
  • “Borrowing” company assets
  • Company vehicles
  • Supplies
  • Computers & office equipment
  • Results in lost productivity, increased wear on equipment, etc.
  • Inventory Larceny
  • Strict theft of inventory
  • Unconcealed on the books
  • Perps often highly trusted, with access to secure inventory
  • Examples:
  • After-hours theft from warehouse/storeroom
  • Employee and accomplice stage fake sale
  • Inventory Larceny – Countermeasures
  • Restrict access to merchandise
  • Keep merchandise in guarded, locked area
  • Install surveillance cameras
  • Use access logs to track those who enter restricted areas
  • Assign personal access codes to employees who are able to open warehouses, storerooms, etc.
  • Inventory Larceny – Countermeasures
  • Conduct physical inventory counts independent of warehousing function
  • Match inventory at beginning of month to balance at end of previous month
  • Investigate any significant shrinkage
  • Look for increases in cost of goods sold
  • Establish confidential whistleblowing mechanism
  • Fraudulent Asset Requisitions
  • Perp requisitions inventory/materials for project
  • Divert materials from job site
  • Very common in construction industry
  • Variation:
  • Classify inventory as damaged or scrap
  • Purchasing and Receiving Schemes
  • Perp usually involved with receiving/warehousing function
  • Steal portion of incoming shipment
  • Mark shipment “short”
  • Reject portion of shipment as “substandard”
  • False Shipments of Inventory
  • Perp usually involved in sales or shipping/warehousing function
  • Prepare fraudulent packing slip
  • Authorizes shipment of targeted inventory
  • Delivered to perp, accomplice, or mail drop
  • Fake sales may be created to support shipment
  • Receivable eventually gets written off
  • Concealed Inventory Schemes – Countermeasures
  • Track invoices to inventory on hand
  • Perform trend analysis for:
  • Increasing levels of scrap
  • High levels of re-orders
  • High levels of “short” shipments
  • Increase in bad debt expense
  • Reconcile materials ordered to work done
  • Concealed Inventory Schemes – Countermeasures
  • All shipments must be matched to sales
  • Independently investigate customer complaints of short shipments
  • Verify support for all reductions to perpetual inventory
  • Periodically compare customer shipping addresses to employee addresses
  • Concealing Inventory Shrinkage
  • Alter inventory records
  • Force reconciliation of physical/perpetual inv.
  • Adjusting entries to inventory, cost goods sold
  • Fictitious sales and accounts receivable
  • Write off to bad debts expense or discounts
  • Write off inventory
  • Lost, obsolete, scrap
  • Physical padding
  • Inventory Fraud Controls
  • Separate the following functions:
  • Requisition of inventory
  • Receipt of inventory
  • Disbursement of inventory
  • Conversion of inventory to scrap
  • Receipt of proceeds from disposal of scrap
  • All shipments must be matched to sales
  • Inventory Fraud Controls
  • All merchandise received must be matched to purchase order and invoice
  • Inventory counts should be subject to:
  • Complete recounts by independent personnel
  • Recounts of merchandise with substantial value
  • Spot-checks by supervisors
  • Inventory turnover rate and cost per unit should be regularly calculated and compared to previous years
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