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Question 17: During an audit of a retail organization, an internal auditor found a scheme in which the
warehouse director and the purchasing agent diverted approximately $500,000 of goods to their own
warehouse, then sold the goods to third parties. The fraud was not found earlier since the warehouse
director updated the perpetual inventory records and then forwarded receiving reports to the
accounts payable department for processing. Which of the following procedures would have most
likely led to the discovery of the missing materials and the fraud?
A. Select a random sample of receiving reports and trace to the recording in the perpetual inventory
records. Note differences and investigate by type of product.
B. Select a random sample of purchase orders and trace to receiving reports and to the records in the
accounts payable department.
C. Take an annual physical inventory, reconciling amounts with the perpetual inventory records. Note
the pattern of differences and investigate.
D. Select a random sample of sales invoices and trace to the perpetual inventory records to see if
inventory was on hand. Investigate any differences.
Correct Answer: C
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