Audit and Assurance Practice Exam

What type of fraud might occur if an employee adjusts inventory records to inflate the amount on hand?

1. Embezzlement

2. Vendor fraud

3. Inventory theft

4. False reporting

The correct answer is: Vendor fraud

The correct answer is best identified as false reporting. This occurs when an employee manipulates financial data or records, such as inventory levels, to present a misleading picture of the company's assets. By inflating the inventory amount on hand, the employee is providing inaccurate information that could affect the company's financial statements and the decisions made by stakeholders who rely on this data. False reporting can be a form of internal fraud where the intention is often to deceive management or auditors or to achieve personal benefits such as bonuses tied to performance metrics that rely on those inflated figures. This tactic aims to create a false impression of inventory strength or availability, which, if undetected, can potentially lead to further fraudulent activity or financial misrepresentations. While the other options mention different forms of fraud, they do not directly apply to the action of inflating inventory records. Embezzlement generally entails the misappropriation of funds while vendor fraud involves dishonest practices related to vendors or suppliers. Inventory theft pertains specifically to the physical removal of inventory rather than the manipulation of records.