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.
d
FEEDBACK: a. Incorrect. Fraud occurs when a company overstates inventory, which will decrease the inventory turnover ratio and not increase.
b. Incorrect. When a company overstates its inventory balance, cost of goods sold is usually understated, the result is an increase in the gross profit ratio.
c. Incorrect.
d. Correct. When a company overstates its inventory, inventory turnover ratio will decrease. This reduction in inventory turnover ratio will then decrease the denominator in number of days' sales in inventory, artificially forcing the ratio to increase.
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