Which of the following is most likely an indicator of fraud involving inventory overstatement?
A) A sudden increase in the inventory turnover ratio
B) A sharp decrease in gross profit margin
C) A sudden decrease in sales
D) A sudden increase in number of days' sales in inventory

Question

Quizplus · Accepted Answer

When the inventory is overstated, the number of days' sales in inventory increases because there is an excess of inventory that is not being sold. This means that the company is holding onto inventory longer and is unable to turn that inventory into sales, which results in an increase in the number of days' sales in inventory. A sudden increase in this ratio could be an indicator of fraud involving inventory overstatement. On the other hand, a sudden increase in the inventory turnover ratio would be an indicator of fraud involving inventory understatement. A sharp decrease in gross profit margin and a sudden decrease in sales could be indicators of various types of fraud but not necessarily inventory overstatement.

Which of the Following Is Most Likely an Indicator of Fraud