Certified Internal Auditor (CIA) Part 2: Practice of Internal Auditing — Question 50

Which of the following would be a red flag that indicates the possibility of inventory fraud?
I. The controller has assumed responsibility for approving all payments to certain vendors.
II. The controller has continuously delayed installation of a new accounts payable system, despite a corporate directive to implement it.
III. Sales commissions are not consistent with the organization's increased levels of sales.
IV. Payments to certain vendors are supported by copies of receiving memos, rather than originals.

Answer options

• A. I and II only
• B. II and III only
• C. I, II, and IV only
• D. I, III, and IV only

Correct answer: C

Explanation

The correct answer is C because all three statements I, II, and IV present significant concerns: concentrating payment approval in one individual (I) raises the risk of collusion, delaying the new accounts payable system (II) could hinder proper oversight, and using copies of receiving memos instead of originals (IV) suggests attempts to obscure transactions. Statement III, while potentially concerning, does not directly indicate inventory fraud.