inventory

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You keep looking over the financials to see where your analysis is wrong- but you can't see any problems-it just looks like inventory is getting larger and larger, but you know that you haven't seen growth in the levels of inventory that the financials seem to be indicating. You start to wonder, as the controller of the company, what could be some of the possible reasons. You just finished a comprehensive audit of all the physical controls of inventory so you doubt inventory is being stolen. Everything else in the financials seems to look fine. In fact, they seem to indicate that the company is improving in profitability.

What might be a valid reason for why inventory appears to increase and how would this be accomplished

Inventory shortage is one of the fastest growing expenses in manufacturing today-and no manufacturer is immune. Each dollar of missing inventory at cost is a dollar less of gross profit, then net profit, also.
Manufacturers need to know how to calculate the amount of shortage they are experiencing; determine where and why it is occurring; and then implement appropriate and aggressive shortage controls.
But first, what is shortage? It's more than just stealing. Simply put, it's the difference between your book (or calculated) inventory amount and the amount you physically count. It's dangerous and expensive to assume, however, that this difference is all the result of stealing.
Causes of Shortage
The largest cause of manufacture shortage is pilferage. Pilferage is stealing, and that includes both employee theft and shoplifting (sometimes referred to as internal and external theft). Figures from the National Manufacture Federation show a loss of approximately 1.8 percent in revenues due to theft for all types of manufacturers in recent years.
A second cause of inventory shortage is not talked about as much, but is an important component: unrecorded dollar fluctuations and other bookkeeping errors. Examples of this type of shortage are unrecorded markdowns, transfers, giveaways, damaged goods, misreading or mis recording sales and/or receipt ...