Forensic Audit Case Study on Inventory Manipulation

For readers who want to understand such investigations more deeply, concepts like hypothesis building, data analytics, ERP log analysis, and evidence evaluation are explained practically in my Master Blaster of Forensic Accounting and Investigation, which mirrors real-life cases like this one.

6. EXECUTION / FIELDWORK (FAIS 310–350)

• Surprise physical verification at all 6 warehouses
• Independent counting of high-value SKUs
• Reconciliation of physical stock with ERP records

• Significant shortages in 14 high-value items
• Excess quantities recorded only in ERP

1. Inventory Aging Analysis
• ₹118 crore inventory lying >18 months without movement.
2. Manual Adjustment Analysis
• 62% of upward adjustments approved by one warehouse manager.
3. Cut-off Testing
• Goods issues recorded without dispatch documents.
4. Shrinkage Pattern Analysis
• Losses consistently booked just before audits.

• Goods receipt notes (GRNs)
• Stock transfer notes
• Inventory adjustment memos
• Obsolescence write-off approvals

• Back-dated GRNs
• Same handwriting on multiple issue slips
• Missing transporter challans

• Reviewed ERP logs for inventory edits
• Identified bulk quantity increases late at night
• Detected override of negative stock controls

• Claimed adjustments were “management instructed.”

• Relied on store records without independent verification.

• Confirmed discrepancies between physical stock and system data.

7. FINDINGS (FAIS 410)
Finding 1: Inventory Non-Existence Confirmed Physical verification confirmed shortages of inventory valued at ₹42 crore. ✔Hypothesis H1 — Accepted
Finding 2: Artificial Inflation Through Adjustments Inventory quantities were increased through unauthorized manual entries.
✔Hypothesis H2 — Accepted
Finding 3: Obsolete Inventory Over-Valued NRV not assessed for slow-moving items, overstating inventory by ₹27 crore.
 ✔ Hypothesis H3 — Accepted

8. QUANTIFICATION OF LOSS (FAIS 420)

9. RECOMMENDATIONS (FAIS-ALIGNED) Immediate

1. Suspend implicated warehouse and inventory staff
2. Lock manual override access
3. Write-down obsolete inventory

1. Implement RFID/barcode-based tracking
2. Quarterly cycle counts
3. ERP alerts for abnormal adjustments
4. Independent inventory verification by Internal Audit

10. LIMITATIONS (FAIS 430)

• Certain third-party warehouse records were incomplete
• Historical data gaps due to ERP migration

Understanding cases like this requires not just audit knowledge but a structured forensic mindset, which is exactly what practical learning in programs like Master Blaster of Forensic Accounting and Investigation helps develop over time.

11. CONCLUSION (FAIS-COMPLIANT)

The forensic investigation, conducted in accordance with ICAI FAIS standards, confirms deliberate manipulation of inventory records through inflated quantities, over-valuation, and misappropriation. These actions resulted in a material overstatement of inventory and profits amounting to ₹88 crore, necessitating immediate corrective, disciplinary, and governance actions.

Frequently Asked Questions (FAQs) 

1. Why is inventory manipulation difficult to detect during regular audits? 
Inventory manipulation often involves manual overrides, back-dated entries, and collusion between departments. Regular audits rely heavily on controls and samples, whereas forensic audits dig deeper using data analytics, surprise checks, and transaction pattern analysis. 

2. What are the biggest red flags of inventory fraud in companies?
Common red flags include inventory growing faster than sales, rising inventory days, frequent manual adjustments, delays in physical stock verification, unexplained margin fluctuations, and weak controls over third-party warehouses. 

3. How does a forensic audit differ from a statutory or internal audit in such cases?
A forensic audit starts with suspicion and focuses on proving or disproving fraud through evidence, documentation, data analytics, and interviews. Unlike statutory audits, it aims to identify manipulation, quantify losses, and establish responsibility.