Which fraud is most difficult to perpetrate for multiple years?
A) Overstating inventory - because last year's overstatement must be offset in the current year.
B) Overstating inventory - because physical assets are easily audited making it easy to detect inventory fraud in the long run
C) Overstating revenue - because auditors focus the most attention on revenue recognition
D) Overstating revenue - because it is difficult to create fake cash year after year

Question

Quizplus · Accepted Answer

With revenue frauds, reported revenues are overstated in the current period, but a compounding effect does not occur in subsequent periods. With inventory frauds, the overstated ending inventory of one period becomes the overstated beginning inventory of the next period, causing net income in the second period to be understated. To continue the inventory fraud, management must offset the overstated beginning inventory by overstating ending inventory by more than the previous year in order to maintain a similar fraudulent pattern.

Which Fraud Is Most Difficult to Perpetrate for Multiple Years