Credit memos are created when a product is returned. Credit memos reduce accounts receivable (A/R) by crediting the account, and it writes off the invoice. This also records a debit to the Sales Returns and Allowances account. You have noticed that the A/R clerk has created an abnormally high number of credit memos. You also notice the inventory does not reflect the additional inventory resulting from the sales returns. What would you do, and how would you document your decision?

One point to consider when responding to this scenario is that an A/R clerk, in the accounting chain, is the lowest level as far as having control in manipulating records. With that said, A/R manager or the accounting manager would likely be aware of what is occurring and why it is occurring. I bring this up because the scenario does not necessarily state our position within the company. So if I am employee in the purchasing department noticing this I would be inclined to reach out to the employee's immediate supervisor and go from there.