Which statement is TRUE regarding an overstated refund scheme?

• A. An employee overstates the amount of a legitimate refund and keeps the excess cash.
• B. It is based on an entirely fictitious refund transaction.
• C. It requires collusion between the customer and the employee.
• D. The company's inventory balance on the books will be understated.

Answer: (A)

Overstated refunds are a cash misappropriation where a real refund is issued, but the amount is padded so the employee pockets the extra cash. In this example, an employee processes a legitimate refund but inflates the amount and keeps the excess. The customer still receives a refund, but the company records a larger cash out than warranted, which is the essence of the fraud. This doesn’t require creating fake refunds or colluding with a customer, so it isn’t about fictitious transactions or necessarily about partnering with the customer. And the impact on the inventory balance isn’t the defining effect here; inflating a refund mainly affects cash and the revenue/expense recording, not a systematic understatement of inventory.