Audit and Assurance Practice Exam

An employee is involved in vendor fraud when he or she creates false records for items that do not exist, such as inflated inventory count sheets or bogus receiving reports. Is this statement true or false?

1. True

2. False

3. Depends on context

4. Not applicable

The correct answer is: False

The correct perspective on this statement is that it is indeed false. Vendor fraud typically involves deceitful actions aimed at manipulating the procurement process or benefiting from fraudulent financial transactions between an organization and its suppliers. However, the specific scenario described—creating false records for nonexistent items, such as inflated inventory counts or bogus receiving reports—more accurately falls under the category of internal fraud or inventory fraud rather than vendor fraud. In vendor fraud, the deception usually involves collusion with external parties, such as suppliers or vendors, to either obtain goods or services that were not truly delivered or to facilitate undue financial benefits. In contrast, the manipulation of internal records that does not directly involve external vendors characterizes misrepresentation within the company itself. It is important to understand that while both types of fraud are serious violations, they operate under different contexts and implications. Misleading inventory counts or receiving reports could lead to financial statement inaccuracies and potentially also involve elements of asset misappropriation or financial fraud, but they should not be labeled under vendor fraud in isolation. Thus, identifying the difference is crucial to understanding the nuances of fraud types in the audit and assurance context.