Question

QUESTION: Paraphrase this article into your own words.

Article: Ghost Goods: How to Spot Phantom Inventory by JOSEPH T. WELLS

In this article “Ghost Goods: How to Spot Phantom Inventory” by JOSEPH T. WELLS examines
the inventory’s manipulations. The valuation of inventory involves two separate elements:
quantity and price. Determining the quantity of inventory on hand is often difficult. Goods are
constantly being bought and sold, transferred among locations and added during a manufacturing
process. Figuring the unit cost of inventory can be problematic, too; FIFO, LIFO, average cost
and other valuation methods can routinely make a material difference in what the final inventory
is worth. As a result, the complex inventory account is an attractive target for fraud.
The obvious way to increase inventory asset value is to create various records for items that do
not exist: unsupported journal entries, inflated inventory count sheets, bogus shipping and
receiving reports and fake purchase orders. Since it can be difficult for the auditor to spot such
phony documents, he or she normally uses other means to substantiate the existence and value of
inventory.
Observation of physical inventory. The most reliable way to validate inventory quantity is to
count it in its entirety.
Analytical procedures. Ghost goods throw a company’s books out of kilter. Compared with
previous periods, the cost of sales will be too low; inventory and profits will be too.

Answer 1

As per Joseph T. Wells in his article Ghost Goods: How to Spot Phantom Inventory , throws lights over the most easy way to manipulate the books, that is by atlering the inventory. In a practical world, business with numerous sales and purchases always have inventory of fluctating numbers. The inventory recorded in the books is product of quantiy and value, both of which can be rigged. While the value can be determined via bills and comparing rates, quantiity can be manipulated in a big way by adding the ghost inventory. Excess inventory at the year end shows lower cost of goods sold and ultimately higher prodfits. This propels management at times to add the ghost inventory to overturn the bad quarter or year end results. For an auditor, it is a matter of conscious as to how to approach towards inventory valuation. There are various analytical procedures prescribed which can be followed along with the full inventory check up also.

Note: I am assuming this is a complete article. !!