Detecting an inventory fraud scheme requires analyzing patterns of inventory adjustments, particularly across different locations. Fraudulent activities often involve unauthorized write-offs, stock transfers, or misstatements of inventory levels.
(A) Analyze invoice payments just under individual authorization limits.
Incorrect: This technique is useful for detecting procurement fraud or invoice splitting, but not directly related to inventory fraud.
(B) Analyze stratification of inventory adjustments by warehouse location. (Correct Answer)
Fraudulent inventory write-offs often occur in specific warehouses or locations where controls are weak.
Stratifying inventory adjustments helps identify abnormal patterns, such as excessive losses in one location.
IIA Standard 2120 (Risk Management) recommends data analytics and trend analysis to detect anomalies.
COSO ERM – Control Activities emphasizes monitoring and review of inventory adjustments to prevent fraud.
(C) Analyze inventory invoice amounts and compare with approved contract amounts.
Incorrect: This technique is effective for detecting overbilling or procurement fraud, but not inventory fraud, which involves physical stock manipulation.
(D) Analyze differences discovered during duplicate payment testing.
Incorrect: Duplicate payment testing helps uncover billing fraud, not inventory fraud.
IIA Standard 2120 – Risk Management: Encourages fraud detection through trend analysis and data monitoring.
IIA Practice Guide – Auditing Inventory Management: Suggests stratification of inventory adjustments to identify fraud.
COSO ERM – Control Activities: Recommends monitoring inventory transactions to prevent fraud.
Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) because analyzing stratification of inventory adjustments by warehouse location helps detect irregular patterns indicative of fraud.
