Asset Misappropriation: Inventory and Other Assets

Theft and misuse of inventory and other non-cash assets, and the controls that prevent and detect it.

5 minutes 5 Questions

Asset misappropriation involving inventory and other non-cash assets is a major category within the ACFE's Fraud Tree, covered in the CFE Exam's Financial Transactions and Fraud Schemes section. While cash schemes are more common, non-cash misappropriation often produces larger median losses becaus…

Concepts covered
Detecting Inventory TheftPreventing Inventory TheftInventory Theft Schemes
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CFE - Asset Misappropriation: Inventory and Other Assets Example Questions

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Question 1

In an asset requisition scheme, an employee uses internal documents such as materials requisitions to move inventory to a location where it can be more easily misappropriated.

Correct Answer: True

Asset requisitions and transfers are internal documents that authorize moving assets from one location to another within an organization. In an asset requisition scheme, the perpetrator uses these documents to justify moving inventory or other assets, often overstating the amount needed for a project, and then steals the assets in transit or from the new location. This differs from simple larceny, where assets are taken without any attempt to justify their movement with documents.

Question 2

An analytical review showing cost of goods sold increasing at a disproportionately higher rate than sales can be a red flag that stolen inventory has been concealed.

Correct Answer: True

Stolen inventory is often written off or absorbed into cost of goods sold. As a result, cost of goods sold can rise out of proportion to sales when purchase prices, quantities and quality have stayed the same. Analytical review of this relationship is a recognized detection measure for inventory theft schemes.

Question 3

At a distribution center, periodic physical counts agree with the perpetual inventory records. However, gross margin has declined while sales have stayed flat. A shipping clerk can prepare shipping documents and relieve items from inventory in the system, and a fraud examiner suspects the clerk is sending goods to an accomplice. Which detection procedure is MOST likely to reveal the scheme?

Correct Answer: Match shipping documents to sales orders and customer invoices

Matching shipping documents to sales orders and customer invoices exposes shipments that have no legitimate sale behind them. That gap is exactly what happens when a clerk creates false shipping documents and relieves the stolen goods from the perpetual records.
Matching receiving reports to purchase orders tests the purchasing cycle, not outgoing shipments. A surprise count will still agree with the records, because the clerk already removed the goods in the system. Reviewing obsolete or damaged write-offs misses the scheme, since the concealment here is a fake shipment, not a write-off.
Key concept: detecting fraudulent shipments that are concealed by altering the perpetual inventory records.

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