FINANCIAL CONTROLS AND OPERATING CONTROLS FOR INVENTORY AND PURCHASES TRANSACTIONS & LONG TERM ASSETS Inventory and Cost of Goods Sold Frauds Inventory – includes all the goods a company  owns and holds for sale in the normal course of  operations; it is a merchandiser’s most  important asset.  Cost of Goods sold – is the entity’s cost of its  inventory that has been sold to customers. It is  the merchandiser’s major expense. Effect of Cost of Goods Sold on Inventory Cost of Goods Sold   Beginning Inventory Overstated  Understated  Ending  Purchases Inventory No effect No effect + Purchases of inventory No effect Understated ­ Returns of inventory to  vendor ­ Purchase discounts on  inventory purchases No effect No effect No effect No effect   Goods available for sale No effect Understated ­ Ending inventory Overstated No effect     Cost of goods sold Understated Understated Income Statement Overstated Inventory   Gross Revenues (sales) No effect ­ Sales returns No effect ­ Sales discounts No effect   Net Revenues (sales) No effect ­ Cost of goods sold Understated   Gross Margin Overstated ­ Expenses No effect  Net Income Overstated 1 Purchase inventory Return  YES goods? NO YES Take  discount? 2 Return merchandise to  supplier 3 Pay vendor within  discount period NO 4 Pay v ...
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