Which of the following signals a potential fraud that may occur for the overstatement of inventory accounts?
A) Reserves for contingencies are reducing rapidly.
B) Inventory amounts are growing faster than sales.
C) Repairs and maintenance accounts have significant credit entries.
D) The purchase of manufacturing equipment is occurring at a rapid rate.

Question

Quizplus · Accepted Answer

When inventory amounts are growing faster than sales, it is a potential signal of overstatement of inventory accounts, which can be a result of fraudulent practices such as counting obsolete items, including items not yet received, or inflating values of inventory by adding nonexistent items. Reserves for contingencies reducing rapidly, repairs and maintenance accounts with significant credit entries, and purchase of manufacturing equipment occurring at a rapid rate do not directly signal potential fraud in inventory accounts.

Which of the Following Signals a Potential Fraud That May