,AUE4863 ASSIGNMENT 2 2026
DUE DATE:29 JUNE 2026
QUESTION 1
Four (4) schemes through which raw materials and finished goods could be
misappropriated at La Batho Agri Processing (Pty) Ltd
La Batho operates in a high-risk environment for inventory misappropriation due to its
decentralised production hubs, large-scale movement of goods, cross-border distribution,
and high-value, easily resalable agricultural products such as maize meal, cooking oils, and
canned goods. According to the Association of Certified Fraud Examiners (ACFE), inventory
and asset misappropriation remains one of the most common forms of occupational fraud,
particularly in organisations with weak segregation of duties, complex logistics chains, and
high-volume stock movement (ACFE, 2024).
Within internal auditing frameworks such as COSO’s Internal Control–Integrated Framework,
inventory fraud typically arises where control activities, monitoring systems, and physical
safeguards are insufficient to prevent, detect, or deter irregularities (COSO, 2013). Against
this background, four key schemes are critically discussed below.
1. Direct Theft and Pilferage of Raw Materials and Finished Goods
One of the most straightforward yet pervasive schemes involves the physical theft or
pilferage of raw materials and finished goods by employees or colluding external parties. In
La Batho’s case, raw materials such as maize, oil, and peanuts are highly susceptible to theft
due to their bulk storage nature and frequent movement between hubs.
This scheme often occurs in warehouses, during loading and unloading processes, or in
transit between production hubs such as Mbombela, Mooketsi, Botshabelo, and Mafikeng.
, Employees may remove small quantities repeatedly (a “salami slicing” technique), making
detection difficult over time. Alternatively, more significant losses may occur where
warehouse supervisors or logistics personnel deliberately bypass inventory controls and
authorise unauthorised removals.
Critically, decentralisation significantly weakens oversight because physical supervision
becomes inconsistent across hubs. Where segregation of duties is weak—particularly
between receiving, storage, and dispatch functions—opportunities for concealment increase.
The ACFE (2024) notes that asset misappropriation schemes involving inventory theft are
often prolonged due to inadequate reconciliation procedures and reliance on manual stock
counts.
In La Batho’s cross-border operations, pilfered goods may also be diverted into informal
markets in neighbouring countries, where resale tracking is limited. This further complicates
detection and recovery.
2. Fictitious Sales, Shipments, or Ghost Inventory Manipulation
A second major scheme involves the manipulation of accounting records through fictitious
sales or ghost shipments. In this scheme, employees create false documentation indicating
that goods have been sold or dispatched when, in reality, the inventory remains in storage
or has been diverted.
At La Batho, this could occur through falsified delivery notes, manipulated warehouse
management system entries, or collusion between dispatch clerks and logistics providers.
For example, finished goods may be recorded as shipped to NGOs or retail outlets in
Mozambique or Eswatini, while physically remaining in internal storage or being diverted
elsewhere for personal gain.
DUE DATE:29 JUNE 2026
QUESTION 1
Four (4) schemes through which raw materials and finished goods could be
misappropriated at La Batho Agri Processing (Pty) Ltd
La Batho operates in a high-risk environment for inventory misappropriation due to its
decentralised production hubs, large-scale movement of goods, cross-border distribution,
and high-value, easily resalable agricultural products such as maize meal, cooking oils, and
canned goods. According to the Association of Certified Fraud Examiners (ACFE), inventory
and asset misappropriation remains one of the most common forms of occupational fraud,
particularly in organisations with weak segregation of duties, complex logistics chains, and
high-volume stock movement (ACFE, 2024).
Within internal auditing frameworks such as COSO’s Internal Control–Integrated Framework,
inventory fraud typically arises where control activities, monitoring systems, and physical
safeguards are insufficient to prevent, detect, or deter irregularities (COSO, 2013). Against
this background, four key schemes are critically discussed below.
1. Direct Theft and Pilferage of Raw Materials and Finished Goods
One of the most straightforward yet pervasive schemes involves the physical theft or
pilferage of raw materials and finished goods by employees or colluding external parties. In
La Batho’s case, raw materials such as maize, oil, and peanuts are highly susceptible to theft
due to their bulk storage nature and frequent movement between hubs.
This scheme often occurs in warehouses, during loading and unloading processes, or in
transit between production hubs such as Mbombela, Mooketsi, Botshabelo, and Mafikeng.
, Employees may remove small quantities repeatedly (a “salami slicing” technique), making
detection difficult over time. Alternatively, more significant losses may occur where
warehouse supervisors or logistics personnel deliberately bypass inventory controls and
authorise unauthorised removals.
Critically, decentralisation significantly weakens oversight because physical supervision
becomes inconsistent across hubs. Where segregation of duties is weak—particularly
between receiving, storage, and dispatch functions—opportunities for concealment increase.
The ACFE (2024) notes that asset misappropriation schemes involving inventory theft are
often prolonged due to inadequate reconciliation procedures and reliance on manual stock
counts.
In La Batho’s cross-border operations, pilfered goods may also be diverted into informal
markets in neighbouring countries, where resale tracking is limited. This further complicates
detection and recovery.
2. Fictitious Sales, Shipments, or Ghost Inventory Manipulation
A second major scheme involves the manipulation of accounting records through fictitious
sales or ghost shipments. In this scheme, employees create false documentation indicating
that goods have been sold or dispatched when, in reality, the inventory remains in storage
or has been diverted.
At La Batho, this could occur through falsified delivery notes, manipulated warehouse
management system entries, or collusion between dispatch clerks and logistics providers.
For example, finished goods may be recorded as shipped to NGOs or retail outlets in
Mozambique or Eswatini, while physically remaining in internal storage or being diverted
elsewhere for personal gain.
