What can cause inventory shrinkage?

Inventory shrinkage refers to a reduction in inventory that cannot be accounted for by sales, typically caused by factors such as theft, loss, or mismanagement. Internal or external theft is a significant contributor, where employees or customers may take inventory without proper recording. Human error can also lead to shrinkage, such as inaccurate record-keeping or miscounting during inventory assessments.

In contrast, accurate accounting practices, high employee morale, and regular physical inventory counts are designed to mitigate or prevent shrinkage. Accurate accounting helps ensure that all inventory movements are tracked properly, while high employee morale can lead to more conscientious work behavior, reducing the chances of theft or mistakes. Regular physical inventory counts are an essential control measure to identify discrepancies promptly and address them before they lead to significant shrinkage. Thus, the presence of internal or external theft and human error directly correlates with the occurrence of inventory shrinkage, making it the correct answer.