[Anonymous]

An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

A. fictitious credit sales have been recorded during the year.

B. employees have stolen inventory just before the year-end.

C. the client recently tightened its credit-granting policies.

D. an employee has been lapping receivables in both years.

A. Accounts receivable turnover is affected by the balance in accounts receivable, so fictitious credit sales could be the cause. The other answer choices would not cause the turnover ratio to decrease.If fictitious sales were recorded, the net credit sales (numerator) would increase. Since the sales are not real, the ending accounts receivable balance would also be higher than normal. These “fake” receivables are also not being repaid. This in turn, means that the average receivables (denominator) would get larger. This would in all likelihood result in a lower receivable turnover ratio.

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Why is it not also C? Since A/R Turnover is net credit sales divided by avg A/R, a decrease in net credit sales could have also caused a decrease in the turnover ratio, and more strict credit granting policies could have caused a decrease in credit sales.

[Mamabear]

It's been a while since I studied this, but I think if they are getting stricter with granting credit then yes, the credit sales would go down, but the A/R associated with those credit sales would go down too so there would be no affect on AR Turnover. To book a sale on credit you debit A/R and you credit sales. If the credit was never granted then the sale wouldn't be booked.

CPA Exam - Finally DONE (November 2014)
BEC (08/10/13) 80
AUD (08/24/13) 65 (11/13/13) 85
FAR (04/12/14) 81
REG (07/19/14) 69 (11/29/14) 87!!

[Anonymous]

Anyone want to give this Audit MCQ a shot?

Help with AUD Question: Ratios

This question is a bad one

[outstanding CPA]

In my opinion, fictitious credit sales will definitely decrease the the receivable turnover because this will increase the credit sales and the receivable by the same amount, while tightening the credit policy will cause a decrease in both the credit sales and the receivable. An example for this could be:

The credit sales was 500, the receivable was 100 , and the original ratio= 5

After the change in the credit policy, the credit sales may decrease to 450 and the receivable will also decrease (because of the faster collection), for example to 50, then the new ratio would be 450/50 = 9 which means an increase in the ratio.

Hope that helps.

Far 83 (Jan 2014)
Reg 90 (May 2014)
Bec 84 (Aug 2014)
Aud 99 (Nov 2014)
Ethics 96

[kahtwoloo]

I agree with Amanda_88. It's a shit question. HOWEVER, I think the point they're trying to make with it is you really need to ‘analyze' analytical procedures and consider every account affected by the scenario instead of the obvious one or two accounts.

BEC-51,71,70,77
AUD-50,62,68 (retake july)
REG-55
FAR-15(didnt study)

[spade13]

I know it's been a while since this was asked, but I didn't think it was explained well. So I'll try.

A higher turnover ratio is better than a lower one because it means receivables are collected faster. So if fictious credit sales are being recorded then they're presumably not being paid either. This would slow collection rates causing a lower turnover ratio.

If credit policy tightens, there will be less sales and presumably faster collection rates. This would theoretically improve (increase) the turnover ratio.

You can't get caught up with “what if though” scenarios. Just understand the question is there to test your understanding of fundamentals.

[Author]

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