What is a common indicator of inventory theft in financial statements?

When examining financial statements for signs of inventory theft, one common indicator is when the cost of goods sold rises disproportionately compared to sales. This scenario can suggest that inventory is being stolen or mismanaged. If a company experiences an increase in the cost of goods sold without a corresponding increase in sales, it may indicate that inventory is missing or has been misappropriated, as there should typically be a correlation between sales and inventory costs.

The disproportionate rise in the cost of goods sold relative to sales may reflect losses in inventory that are not accounted for in revenue figures, which can flag potential fraud. It indicates a possible discrepancy in the inventory records, suggesting that products have been taken without the sales being recorded, rather than a legitimate spike in production or sales activities.

Understanding this relationship is essential for fraud examiners, as it signals the need for further investigation into inventory management practices, sales recording, and cost accounting to determine if theft or fraud is occurring.