Foundations of Stock Auditing and Shrinkage Control

Introduction and Context

Stock auditing and shrinkage control are foundational capabilities in supply chain management. They connect the physical movement of goods with financial reporting, operational decision-making, regulatory compliance, customer service, and organizational risk management. Although stock is often viewed as a warehouse or retail concern, its accuracy depends on the entire supply chain: purchasing, receiving, storage, production, transport, sales, returns, information systems, and disposal.

A supply chain can only make reliable decisions when it knows what goods it owns, controls, where those goods are located, what condition they are in, and what value they represent. If the recorded quantity differs from the physical quantity, managers may reorder unnecessarily, promise unavailable goods, report inaccurate assets, misstate margins, or overlook theft and process failure. Stock auditing therefore does more than identify missing items. It tests whether the organization’s physical, informational, financial, and governance systems remain aligned.

Shrinkage is the unexplained or otherwise undesirable reduction of stock between the quantity expected from records and the quantity physically available. It may result from theft, damage, spoilage, administrative error, misreceiving, inaccurate counting, supplier discrepancies, process failures, or system weaknesses. Effective control requires a balanced approach: strong processes and technology, proportionate investigation, competent people, ethical conduct, and continuous improvement.

This chapter establishes the conceptual language and assurance logic required for later study of stocktaking methods, audit design, data analytics, fraud risk, inventory systems, and loss-prevention programs.

Learning Objectives

By the end of this chapter, students should be able to:

1. Define stock, inventory, inventory accuracy, shrinkage, loss prevention, and stock auditing.
2. Distinguish physical, book, available, reserved, damaged, and obsolete stock.
3. Explain the relationship among operational assurance, financial assurance, compliance assurance, and supply-chain assurance.
4. Identify the principal stakeholders in stock auditing and understand their differing interests.
5. Classify common sources of shrinkage and distinguish symptoms from root causes.
6. Apply basic stock-accuracy and shrinkage measures appropriately.
7. Evaluate the governance, ethical, technological, and managerial implications of shrinkage control.
8. Develop a structured response to an inventory discrepancy.

1. The Meaning and Scope of Stock

1.1 Stock and inventory

In everyday business language, stock commonly means goods held by an organization for sale, production, distribution, consumption, or operational support. Inventory is often used as a synonym, although accounting and operations disciplines may use the terms differently. In accounting, inventory generally refers to assets held for sale, in production for sale, or consumed in producing goods or services. In supply chain management, inventory may also be discussed more broadly as a controlled accumulation of materials and products at a point in a system.

The word stock can therefore refer to several categories:

• Raw materials: inputs awaiting production.
• Work in process: partially completed goods.
• Finished goods: products ready for sale or distribution.
• Merchandise: goods purchased for resale without substantial transformation.
• Maintenance, repair, and operating supplies: items used to support operations rather than sold to customers.
• Packaging materials: containers, labels, pallets, and related items.
• Returned goods: products re-entering the organization after customer return.
• Quarantined or restricted stock: goods awaiting inspection, authorization, or disposition.
• Consignment stock: goods physically held by one party but owned by another.

The definition adopted for an audit must be explicit. For example, an audit may include only saleable finished goods, or it may include all goods physically present on a site. Failure to define the population creates apparent discrepancies that are actually classification differences.

1.2 Stock status is as important as stock quantity

A quantity record without status information is inadequate for managerial use. Ten units physically present may not equal ten units available for sale. Some may be reserved for customers, damaged, expired, under quality inspection, subject to recall, or legally restricted.

A useful conceptual relationship is:

This is a simplified operational identity. It assumes that “unrestricted physical stock” excludes goods that are damaged, quarantined, expired, or otherwise unavailable. Organizations may use different system definitions, so the categories must be documented before measurement.

1.3 Ownership and custody

Physical possession does not necessarily establish ownership. A warehouse may hold supplier-owned consignment goods, customer-owned materials, goods in transit, or products awaiting acceptance. Conversely, an organization may own goods stored at a third-party logistics provider. Stock auditing must therefore establish both:

1. Existence: whether the goods physically exist.
2. Rights and obligations: whether the organization owns or controls them and whether other parties have claims.

This distinction is central to financial assurance and prevents double counting or omission.

2. Inventory Accuracy as a Multi-Dimensional Concept

Inventory accuracy is the degree to which recorded stock information corresponds with the actual, authorized, and usable stock position. Accuracy has at least four dimensions:

1. Quantity accuracy: recorded quantity agrees with physical quantity.
2. Identity accuracy: the item, SKU, batch, serial number, or specification is correct.
3. Location accuracy: the system identifies the correct storage or operational location.
4. Status accuracy: the item’s condition, ownership, availability, and restrictions are correctly recorded.

A warehouse may have high quantity accuracy but poor status accuracy if damaged stock remains available in the system. Similarly, a system may show the right item and quantity but the wrong location, causing picking delays and apparent stockouts.

A basic unit-level accuracy measure is:

The criterion must be specified. A record may be considered accurate only when quantity, identity, location, and status all agree; alternatively, an organization may report separate measures for each dimension.

A value-weighted measure may be more appropriate when high-value items carry greater risk:

Here, the summation covers the audited population, and absolute differences prevent positive and negative errors from cancelling each other. This measure assumes comparable valuation bases and is not a substitute for investigating individual discrepancies. It can also obscure serious errors in low-value but operationally critical items.

Worked example: record accuracy

An audit tests 200 SKU-location records. Of these, 186 satisfy the organization’s criterion that quantity, identity, location, and status must agree.

The result means that 93% of tested records met the stated criterion. It does not prove that 7% of total inventory is missing, because the sample may not represent the entire population and because a record error is not necessarily a physical loss.

3. Stock Auditing: Purpose, Scope, and Assurance Logic

3.1 Definition of stock auditing

Stock auditing is the systematic examination of stock existence, quantity, identity, condition, ownership, valuation, movement, controls, and records against defined criteria. It may be performed by internal auditors, external auditors, inventory-control specialists, warehouse managers, finance teams, regulators, or independent service providers.

An audit is more than a count. It includes:

• defining the audit objective and population;
• identifying risks and materiality;
• reviewing procedures and system controls;
• observing or performing counts;
• tracing transactions to source documents;
• reconciling physical findings to records;
• investigating exceptions;
• evaluating causes and consequences; and
• reporting findings and corrective actions.

3.2 Audit objectives

Common stock-audit objectives include:

These objectives overlap but are not interchangeable. A count may support existence while providing little evidence about ownership or valuation.

3.3 Audit criteria and evidence

An audit conclusion is meaningful only when findings are compared with criteria. Criteria may include approved policies, accounting standards, contract terms, warehouse procedures, regulatory requirements, system configurations, or management tolerances.

Evidence may include:

• count sheets and recount records;
• warehouse-management-system transactions;
• purchase orders, receipts, invoices, and shipping documents;
• transfer and adjustment approvals;
• access-control logs and CCTV records, where lawful;
• quality and expiry records;
• supplier and carrier confirmations;
• cycle-count histories;
• interviews and direct observation; and
• analytical reports identifying unusual patterns.

Evidence should be sufficient, reliable, relevant, and appropriately protected. A system report is not automatically reliable merely because it is generated electronically; its configuration, access controls, master data, and audit trail also require evaluation.

4. Shrinkage and Loss Prevention

4.1 Defining shrinkage

Shrinkage is the reduction between the stock quantity or value expected from authorized records and the stock quantity or value verified through physical observation or approved reconciliation. It may be unexplained initially, but it is not necessarily caused by theft.

A basic quantity expression is:

The expected closing quantity is normally derived from an opening balance and authorized movements:

This identity assumes that all listed movements are recorded in the same unit of measure, refer to the same item and ownership population, and use a consistent cut-off time. Returns, cancellations, conversions, and write-offs must be included where applicable. A negative result may indicate overage, timing error, or misclassification rather than a conventional loss.

Shrinkage rate can be expressed in several ways. A quantity-based rate is:

The reference quantity may be opening stock, throughput, average stock, or sales volume. Because the interpretation changes with the denominator, reports must state the chosen basis. A value-based rate may use cost rather than selling price when assessing asset loss:

The symbol i identifies each item category. This calculation assumes that the cost basis is consistently defined and that the units are comparable.

Worked example: shrinkage reconciliation

A distribution center begins the month with 12,000 units. It receives 4,500 units, transfers in 300 units, issues 9,200 units, sells 6,800 units, and transfers out 400 units. There are no approved adjustments.

A physical count finds 370 units. Therefore:

Here, 16,800 is the movement-based reference quantity: receipts plus opening stock. Another organization might use sales or average stock as the denominator. The 30-unit difference should be investigated before being classified as theft or written off.

4.2 Categories and causes of shrinkage

Shrinkage is best analyzed by cause rather than by a single headline percentage.

External theft involves unauthorized removal by customers, visitors, suppliers, carriers, or other external parties. Internal theft involves deliberate unauthorized appropriation by employees or contractors. Process loss arises from handling, damage, leakage, evaporation, breakage, spoilage, or production yield variation. Administrative loss results from incorrect data entry, wrong units of measure, duplicate receipts, unrecorded transfers, mispicks, or unauthorized adjustments. Supplier or carrier discrepancy occurs when delivered quantities, quality, or specifications differ from the documents. System and master-data failure includes incorrect item conversion factors, duplicate SKUs, interface failures, or inadequate transaction sequencing.

The same physical discrepancy may have different causes. For example, a short receipt may reflect supplier error, counting error, packaging configuration confusion, or theft during transport. Cause classification should therefore be evidence-based.

4.3 Loss prevention

Loss prevention is the coordinated set of policies, controls, behaviors, technologies, and investigations designed to prevent, detect, respond to, and learn from avoidable stock loss and related risks. It is broader than physical security. Effective loss prevention addresses the whole process:

1. Prevent: design secure layouts, segregation of duties, clear procedures, and reliable receiving controls.
2. Detect: use cycle counts, exception reports, access logs, reconciliations, and observation.
3. Respond: investigate proportionately, preserve evidence, correct records, and protect people.
4. Recover and learn: pursue recovery where justified, identify root causes, and improve controls.

A narrow focus on surveillance can displace attention from high-frequency administrative errors. Conversely, a purely administrative program may fail to address deliberate theft. A mature program integrates both operational discipline and security risk management.

5. Four Assurance Perspectives

Stock auditing supports several forms of assurance that should be distinguished while being coordinated.

5.1 Operational assurance

Operational assurance asks whether processes reliably produce the intended result. Examples include correct receiving, put-away, picking, replenishment, counting, packing, dispatch, returns, and disposal. Measures include count accuracy, order accuracy, dock-to-stock time, adjustment frequency, and location compliance.

5.2 Financial assurance

Financial assurance concerns the accuracy, completeness, existence, rights, valuation, and cut-off of inventory-related financial information. Shrinkage affects cost of goods sold, gross margin, asset balances, provisions, and write-offs. Financial assurance requires attention to valuation methods, obsolete stock, ownership, and period-end cut-off—not merely physical quantity.

5.3 Compliance assurance

Compliance assurance tests adherence to law, regulation, contractual obligations, internal policy, safety requirements, product traceability rules, customs controls, data-protection obligations, and industry standards. Non-compliance may create penalties, recalls, loss of license, customer claims, or reputational damage even where the physical stock quantity is accurate.

5.4 Supply-chain assurance

Supply-chain assurance evaluates whether the network can provide trustworthy visibility and continuity across suppliers, carriers, warehouses, manufacturers, and customers. It includes traceability, resilience, supplier integrity, chain of custody, cyber controls, and the reliability of information exchanged across organizational boundaries.

These perspectives are mutually reinforcing. A receiving error may create an operational discrepancy, a financial misstatement, a contractual dispute, and a supply-chain visibility failure simultaneously.

6. Stakeholders and Governance

Stock auditing affects stakeholders with different responsibilities and incentives:

• Board and audit committee: oversee risk, control effectiveness, reporting integrity, and ethical culture.
• Executive management: allocate resources, establish risk appetite, and approve corrective priorities.
• Finance: reconcile stock to the ledger, assess valuation, and support financial reporting.
• Operations and warehouse management: control processes, locations, people, and physical movements.
• Procurement: manage supplier terms, delivery accuracy, and ownership conditions.
• Sales and customer service: depend on reliable availability and promise dates.
• Internal audit: provide independent assurance and evaluate governance and controls.
• External auditors and regulators: assess reporting, compliance, and evidence under their mandates.
• Suppliers, carriers, and logistics providers: participate in custody, documentation, and reconciliation.
• Employees and contractors: execute controls and may be affected by investigations.
• Customers and communities: depend on product availability, safety, authenticity, and responsible conduct.

Good governance requires clear accountability. The person who performs a count should not normally be the sole person who approves an adjustment or investigates suspected misconduct. Segregation of duties reduces the opportunity for concealment, although it must be proportionate to organizational size and risk.

Ethical considerations

Shrinkage investigations can affect livelihoods and reputation. Organizations should avoid presuming guilt from a discrepancy, use evidence proportionately, maintain confidentiality, follow employment and privacy law, and provide fair processes. Surveillance technologies, biometric systems, and AI-based anomaly detection require transparency, access controls, retention limits, and safeguards against discriminatory or erroneous profiling.

7. Control Framework for Stock Accuracy

A practical control framework combines preventive, detective, and corrective controls.

The control environment should be risk-based. High-value, high-velocity, regulated, theft-sensitive, temperature-sensitive, or critical items generally justify more frequent and more independent verification than low-value stable items.

Cycle counting and full physical counts

A full physical inventory count attempts to verify the entire defined population at a specified time. It can provide broad assurance but may disrupt operations and create temporary counting behavior. Cycle counting verifies selected items or locations throughout the year. It supports earlier detection, smoother operations, and targeted attention, but its effectiveness depends on sound selection rules and follow-up.

ABC classification is often used to prioritize effort by value or risk. However, value alone is insufficient. A low-cost component that stops a production line may deserve a higher control priority than an expensive but easily replaceable item. A graduate-level control design should consider value, velocity, criticality, volatility, perishability, regulatory status, and loss history.

8. Technology, Data, and Artificial Intelligence

Warehouse management systems, enterprise resource planning systems, barcode scanners, radio-frequency identification, weighing equipment, camera systems, and analytics platforms can improve stock visibility. Their benefits depend on master-data quality, integration, user competence, and governance.

Technology creates new risks as well as controls. Examples include duplicated transactions, interface delays, incorrect unit conversions, shared user credentials, cyberattack, sensor failure, and automation bias. A system-generated quantity should be treated as evidence to be validated, not as unquestionable fact.

Analytics can identify unusual adjustments, repeated short shipments, count overrides, after-hours activity, abnormal employee or location patterns, and mismatches between sales and stock movements. AI may assist prioritization and anomaly detection, but it should not automatically accuse individuals or authorize disciplinary action. Models require representative data, explainable decision criteria, human review, monitoring for false positives, and protection of personal information.

9. Illustrative Case: Meridian Fulfilment Centre

Background

Meridian Fulfilment Centre, an illustrative third-party logistics operation, reported a quarterly inventory accuracy rate of 98.7%. Nevertheless, customer complaints about unavailable products increased, and the finance team identified a growing inventory adjustment expense.

Problem

The headline accuracy measure counted a record as correct when the SKU and quantity matched. It did not test location, ownership, condition, or reservation status. During a targeted review, auditors found that several units shown as available were reserved for other customers, 26 cartons were in an unrecorded quarantine area, and one item had two active units-of-measure conversions in the system.

Analysis

The organization had treated inventory accuracy as a single quantity percentage. Its control design therefore missed several dimensions:

• quantity was sometimes correct but status was wrong;
• goods belonging to different customers were aggregated improperly;
• quarantine movements were recorded on paper but not in the system;
• receiving staff could both create adjustments and approve them;
• the accuracy metric was not risk-weighted or location-specific.

The apparent shrinkage was a mixture of genuine loss, timing differences, misclassification, and system error. A direct accusation of theft would have been unjustified.

Approach and solution

Meridian defined a stock population and cut-off policy, separated customer ownership records, and created explicit statuses for available, reserved, damaged, and quarantined goods. It introduced barcode confirmation at receiving and relocation, required independent approval for material adjustments, and performed cycle counts based on value, velocity, criticality, and prior discrepancy history. It also reported four separate measures: quantity accuracy, location accuracy, status accuracy, and unexplained shrinkage value.

A root-cause review was required for repeated discrepancies rather than merely correcting the balance. The organization also established a protected reporting channel and communicated that investigations would be evidence-based and confidential.

Outcome

After three reporting cycles, available-to-promise reliability improved, unexplained adjustments declined, and customer disputes became easier to resolve. The reported headline accuracy initially fell because the new criteria were stricter; this was a measurement improvement, not necessarily a deterioration in physical control. Over time, the more informative measures showed genuine improvement.

Learning points

1. A high aggregate accuracy percentage can conceal material operational weaknesses.
2. Quantity, identity, location, status, ownership, and condition should be assessed separately where risk requires.
3. Adjusting records is not the same as eliminating the cause of shrinkage.
4. Strong controls require both accountability and procedural fairness.
5. Better measurement may initially reveal more problems; transparency is a prerequisite for improvement.

10. Challenges and Limitations

No stock-audit system provides perfect certainty. Counts can be affected by inaccessible locations, mixed cartons, unit-of-measure confusion, counting fatigue, movement during the count, and ambiguous ownership. Sampling reduces cost but introduces sampling risk. Full counts may produce temporary operational disruption. Financial valuation may depend on estimates of obsolescence, net realizable value, or recoverability. Technology can increase visibility while magnifying errors when bad master data are replicated at scale.

Metrics also require careful interpretation. A low shrinkage rate may reflect under-reporting, delayed discovery, or excessive write-offs rather than strong control. A high adjustment rate may indicate poor accuracy, but it may also reflect a recently improved detection process. Comparisons across sites are misleading unless definitions, populations, valuation bases, and operating contexts are consistent.

Managers should therefore triangulate evidence: quantitative measures, physical observation, process testing, interviews, transaction histories, and independent review. The goal is not merely to produce a favorable percentage; it is to establish trustworthy control over stock and learn from deviations.

Best-Practice Principles

1. Define the stock population, ownership boundary, status categories, units of measure, and cut-off time before auditing.
2. Separate existence, accuracy, condition, ownership, valuation, and compliance objectives.
3. Use risk-based counting and investigation rather than uniform effort everywhere.
4. Reconcile physical findings to authorized movements and preserve an audit trail.
5. Distinguish genuine shrinkage from timing, classification, system, and documentation errors.
6. Measure both outcomes and control quality, including repeat discrepancies and closure time.
7. Maintain segregation of duties for counting, adjustment approval, and investigation.
8. Treat technology and AI as controlled sources of evidence, not infallible authorities.
9. Investigate fairly, protect confidentiality, and comply with applicable law.
10. Use root-cause analysis and corrective action to reduce recurrence.

Chapter Summary

Stock is a controlled physical and informational resource whose importance extends beyond the warehouse. Effective stock auditing examines existence, completeness, quantity, identity, location, status, condition, ownership, valuation, cut-off, safeguarding, and compliance. Inventory accuracy is multidimensional; a correct quantity alone does not guarantee that goods are available, correctly located, saleable, or owned by the reporting organization.

Shrinkage is the difference between expected and verified stock, but the difference is not automatically theft. It may arise from process loss, administrative error, supplier discrepancies, system defects, damage, obsolescence, or deliberate misconduct. Sound analysis uses clearly defined populations, consistent units and cut-offs, appropriate denominators, and evidence-based cause classification.

Stock auditing supports operational, financial, compliance, and supply-chain assurance simultaneously. It requires governance, segregation of duties, reliable evidence, risk-based counting, ethical investigation, and continuous improvement. Technology and analytics can improve detection, but they introduce data, privacy, cyber, and automation risks. The central managerial lesson is that accurate records are not an end in themselves: they enable dependable decisions, trustworthy reporting, resilient supply chains, and responsible stewardship of organizational assets.

Key Terms

Stock: Goods or materials held, controlled, produced, sold, or consumed by an organization.

Inventory: Assets held for sale, production, distribution, or operational use, depending on the adopted definition.

Inventory accuracy: The degree to which stock records correspond with verified quantity, identity, location, status, and condition.

Stock audit: A systematic examination of stock, records, transactions, controls, and related evidence against defined criteria.

Shrinkage: The reduction between expected recorded stock and physically verified stock.

Loss prevention: Policies, controls, technologies, behaviors, and investigations designed to prevent and manage stock loss.

Cycle count: A periodic count of selected stock items or locations rather than the entire population.

Physical inventory count: A count intended to verify the full defined stock population at a specified time.

Book stock: Quantity shown in the inventory or enterprise system.

Physical stock: Quantity actually present and verified through observation or measurement.

Available stock: Stock that is physically present, unrestricted, and not otherwise allocated or unavailable.

Quarantine stock: Goods restricted from use or sale pending inspection, decision, or authorization.

Cut-off: The rule determining the period in which a stock movement is recorded.

Inventory adjustment: An authorized change to the recorded stock balance.

Inventory valuation: The process of assigning monetary value to stock using an appropriate accounting or managerial basis.

Segregation of duties: Separation of responsibilities so that one person does not control incompatible stages of a transaction.

Operational assurance: Confidence that processes perform as intended and produce reliable operational outcomes.

Financial assurance: Confidence that inventory-related financial information is complete, accurate, properly valued, and supported.

Supply-chain assurance: Confidence that goods, information, custody, and controls remain reliable across supply-chain partners and stages.

Root-cause analysis: A structured investigation of the underlying conditions that produced a discrepancy or failure.

Review Questions

Short Answer Questions

1. What is the difference between stock and inventory in operational and accounting contexts?
2. Why is inventory accuracy a multidimensional concept?
3. Define shrinkage and identify two causes that are not theft.
4. What is the purpose of segregation of duties in stock control?
5. Distinguish preventive, detective, and corrective controls.

Long Answer Questions

1. Explain the principal objectives of a stock audit and discuss why a physical count alone cannot satisfy all of them.
2. Compare operational, financial, compliance, and supply-chain assurance using examples from a distribution center.
3. Discuss how stock status, ownership, and condition affect the interpretation of physical quantities.
4. Evaluate the advantages and limitations of cycle counting compared with a full physical inventory count.
5. Explain the ethical and governance requirements for investigating suspected internal shrinkage.

Analytical / Application Questions

1. A warehouse begins with 8,000 units, receives 2,500, transfers in 200, issues 3,000, sells 6,900, and transfers out 300. A count finds 470 units. Calculate expected closing stock and shrinkage quantity, then explain two reasons why the difference should not immediately be classified as theft.
2. Design a risk-based stock-audit program for a pharmaceutical distribution center. Specify the population, audit objectives, stock categories, evidence, frequency, and escalation rules.
3. An organization reports 99.5% inventory accuracy but has frequent customer stockouts and rising adjustment values. Diagnose at least four weaknesses that could be hidden by the headline metric and propose improved measures.

Multiple Choice Questions with Answers

Question 1

Which statement best describes inventory accuracy?

A. The percentage of stock that has a high selling price

B. The degree to which records correspond with verified quantity, identity, location, and status

C. The total monetary value of stock held at year-end

D. The number of employees authorized to enter a warehouse

Correct Answer: B. The degree to which records correspond with verified quantity, identity, location, and status

Question 2

Which audit objective asks whether recorded stock physically exists?

A. Existence

B. Valuation

C. Cut-off

D. Compliance

Correct Answer: A. Existence

Question 3

Which is a non-theft cause of shrinkage?

A. Unauthorized removal by an employee

B. Customer shoplifting

C. Incorrect unit-of-measure conversion

D. Deliberate concealment of goods

Correct Answer: C. Incorrect unit-of-measure conversion

Question 4

A warehouse starts with 1,000 units, receives 300, and issues 500. What is expected closing stock if there are no other movements?

A. 200 units

B. 500 units

C. 800 units

D. 1,800 units

Correct Answer: C. 800 units

Question 5

What is the principal purpose of a cycle count?

A. To verify selected items or locations periodically

B. To replace all financial reporting controls

C. To eliminate the need for receiving procedures

D. To determine customer selling prices

Correct Answer: A. To verify selected items or locations periodically

Question 6

Which control is primarily preventive?

A. A post-count variance report

B. A root-cause investigation after loss

C. Restricted warehouse access

D. A year-end adjustment entry

Correct Answer: C. Restricted warehouse access

Question 7

Why must ownership be considered in a stock audit?

A. Physical possession always proves ownership

B. Goods may be held physically but belong to another party

C. Ownership matters only for damaged goods

D. Ownership determines the number of warehouse employees

Correct Answer: B. Goods may be held physically but belong to another party

Question 8

Which assurance perspective focuses most directly on inventory valuation and financial reporting?

A. Financial assurance

B. Operational assurance

C. Customer-service assurance

D. Layout assurance

Correct Answer: A. Financial assurance

Question 9

Why can a high aggregate inventory-accuracy percentage be misleading?

A. It may conceal errors in location, status, ownership, or high-risk items

B. Accuracy percentages cannot be calculated mathematically

C. A high percentage always proves theft is absent

D. Aggregate measures are never used in auditing

Correct Answer: A. It may conceal errors in location, status, ownership, or high-risk items

Question 10

What is an appropriate principle when investigating suspected employee shrinkage?

A. Presume guilt whenever a discrepancy occurs

B. Use evidence proportionately and protect confidentiality

C. Allow the suspected employee to approve the adjustment

D. Ignore employment and privacy requirements

Correct Answer: B. Use evidence proportionately and protect confidentiality