What happens when an employee records a fictitious refund?

• A. The inventory is overstated
• B. Inventory is returned
• C. The register total is out of balance with the register log
• D. None of the above

Answer: (A)

Fictitious refunds create an artificial return in the books, which inflates the assets. When someone records a return that never happened, the system is set up to increase the inventory balance as if goods were returned to stock, even though no physical goods were received. Meanwhile, cash is reduced or a refund liability is created, but there is no corresponding actual increase in on-hand goods. The net effect is an inventory balance that is higher than what actually exists, causing the asset to be overstated. The other options don’t capture the primary misstatement: a real return doesn’t occur, so “inventory is returned” isn’t accurate, and while a mismatch in the register might occur in some cases, the key consequence of a fictitious refund is the overstated inventory.