Which statement best describes how a fraudster would conceal inventory shrinkage?

• A. Increase the Perpetual Inventory Balance to Match Actual Shrinkage
• B. Decrease the Perpetual Inventory Record to Match the Physical Count
• C. Reconcile the Perpetual Inventory with Cost of Goods Sold
• D. Delete or Cover Up the Correct Totals and Enter New Numbers

Answer: (B)

The concept being tested is how someone committing inventory fraud might hide a shortage by making the records reflect reality rather than reveal the theft. In a perpetual inventory system, the ledger should track what is actually on hand. If the physical count is lower than what the records show, a fraudster would lower the perpetual inventory balance to match the physical count. This makes the books look consistent with the on-hand stock and hides the missing inventory, so there’s no unexplained variance to raise suspicion. Increasing the perpetual balance would overstate assets and draw attention to the shrinkage. Reconciliation with COGS is a normal control activity and doesn’t constitute concealment, while deleting totals and entering new numbers is a more blatant tampering that would also be easily detected.