Audit and Assurance Practice Exam

Which analytical procedure might indicate fraud in the acquisition and payment cycle?

1. Sales growth at a rate lower than inventory growth

2. Inventory growing at a rate greater than sales

3. Reduction in inventory value with stable sales

4. Consistent patterns in supplier pricing

The correct answer is: Inventory growing at a rate greater than sales

The correct choice highlights a scenario where inventory is increasing at a greater rate than sales. This situation could indicate potential fraud in the acquisition and payment cycle for several reasons. When inventory grows significantly faster than sales, it may suggest that a company is purchasing more goods than it is able to sell, which can be indicative of several problems. One possibility is that the company is inflating its inventory levels to misrepresent its financial health, thereby misleading stakeholders about the true performance of the business. Additionally, such a disparity could indicate that the company is engaged in activities like "channel stuffing," where a company sends more goods to distributors than they can sell in a bid to boost sales figures. The mismatch could also be a symptom of fraud involving fictitious inventory purchases or collusion with suppliers, where goods are recorded as assets but either do not exist or do not reflect actual sales activity. In contrast, other options don't signal the same level of concern regarding potential fraud. For example, sales growth at a lower rate than inventory growth could suggest excess inventory but might not be as strong an indicator of fraud as a rapidly growing inventory. A reduction in inventory value while sales remain stable may imply inventory write-downs due to obsolescence or declining market value, which is