[Anonymous]

A few questions like this have come up in the AUD thread & they are just really tricky. The correct answer apparently according to Rogers MCQ is D however, it seems like it could be A or D, really. Anyone have input?

“An auditor discovered the AR turnover decreased from year 1 to year 2. This would indicate that:

a) Fictitious credit sales were recorded during the year

b) Employees stole inventory

c) Client tightened credit granting policy

d) An employee has been lapping receivables in both years

[Anonymous]

I am currently studying for AUD w/ Roger, and like you, take it 8/28. It has not been a pleasant experience. I am looking forward to getting through the rest of the lectures so I can start my NINJA MCQ review.

This question is a bitch. I had the same issue as you did. I assume the reason Roger uses it is because it is a released question, no longer used. I assume the reason it is no longer used is because it is a shit question.

Let's break it down. A/R turnover is net credit sales over average A/R. When credit sales are not specified and beginning and ending A/R is not provided, it is simply sales divided by A/R.

A decrease in A/R Turnover would mean an DECREASE in credit sales, or an INCREASE in A/R balance.

A: If fictitious credit sales were recorded, the sales would increase and A/R would increase by the same amount. This would increase A/R turnover.

B: If an employee stole inventory, it would affect neither sales nor A/R.

C: There isn't enough information to determine how tightening a credit-granting policy would affect BOTH accounts, so it's impossible to say if this would increase or decrease the credit granting policy.

D: Since we know the other 3 are wrong, this has to be the answer. Assuming everything else remains constant, the collection will always be one behind. Since the lapping started in Y1, the beginning A/R balance is correct, while the ending A/R balance is fraudulently overstated. In Y2, the beginning balance is fraudulently overstated, and the ending balance is still fraudulently overstated. Thus, A/R will increase in Y2 relative to everything else, and the A/R Turnover ratio will decrease.

[Anonymous]

I think D is the best answer but the problem that I'm coming across is that if you increase the sales and AR by the same amount, to record fictitious credit sales, then the AR turnover would decrease. I.e. Y1 500/100=5, Y2= 600/200=4.

This question sucks

[Anonymous]

@audit this- I finished my last Becker lecture yesterday and plan to do the MCQS today and this weekend. I'm using the Ninja MCQs for my review too. Can't wait till this is over

[M.O.D.]

If both credit sales and AR were to increase, then yes the ratio would decrease.

But only new credit sales were fictitious, not AR also.

If someone wanted to increase sales, he would increase sales only, not also AR. How would you explain when those fictitious AR accounts go to collection and the companies say they never ordered or received the items?

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

Shoot….Good point. Apparently I don't think like a fraudster 🙂

I know you're good at this stuff @MOD, do you know what the journal entry would look like to record fictitious sales? What would you debit to record credit sales if it's not AR?

DR: ??

CR: Sales

[Anonymous]

While my explanation was assuming the ratio was less than one, the turnover will not necessarily increase or decrease with an increase in sales. If beginning A/R is 100, net credit sales are 100, ending A/R is 200, then your ration is 100/150. When the numerator is smaller, an increase to the numerator will always increase the ratio, regardless of what the denominator does. Because it is not clear what the actual ratio is, we cannot say what effect this would have on the ratio.

Still a shitty question.

Amanda_88, I absolutely hate studying for AUD. I find that I have only paid attention half the time. I loved studying for BEC and FAR because I was engaged and felt that I was actually learning. I don't know if I am burned out or just hate the material, but I despise this section. I feel like I am learning nothing.

[rjcpa]

Amanda, the fraudster would just debit some GL account that #1 doesn't get much attention from the auditors and #2 is an account that could have different types of things running through it. Kinda like a garbage can account.

FAR - 10/3/12 - 86
BEC - 11/27/12 - 70 1/14/13 - 81
AUD - 4/4/13 - 87
REG - 7/8/13 - 80

[Anonymous]

[rjcpa]

BATYCB – they would not debit A/R for bogus sales. Then they would have to hide the non existant A/R later. Remember they are stealing. You dump the debit in an expense account somewhere that auditors dont look.

FAR - 10/3/12 - 86
BEC - 11/27/12 - 70 1/14/13 - 81
AUD - 4/4/13 - 87
REG - 7/8/13 - 80

[M.O.D.]

The credit would be to sales, but the debit could be to any account. Preferably one that is not audited (or lightly audited).

There are as many possibilities as there are types of frauds, ie there is no guidance on how to make fraudulent entries.

If the fraud is “complex” then multiple entries are used (a roundabout way of hiding one's trail).

Ultimately, I would make a debit to assets.

I recall a complex fraud from my auditing class:

Bank acct1 1000

… Sales………. 1000

Building 1000

… Bank acct2 1000

Bank acct2 1000

… Bank acct 1 1000

@ audit this

It is almost impossible for the AR turnover ratio to be less than one.

This implies that net credit sales are less than average AR, which means the collection period is more than one year.

@ rj

Yes, an expense account would work, who audits those.. But that would have the effect of lowering income. And the point of increasing sales is to also increase income, to make the manager look good.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[thelonewolf527]

I think the issue with this question is that other questions I've seen have had A as a correct answer as to something that would decrease AR turnover

AUD - 08/04/14 - 83
FAR - 11/29/14 - 80
REG - 02/26/15 - 89
BEC - 05/30/15 - 86

DONE!

[greg422]

I agree. Depending on your source, A has been the correct answer, although I agree with the logic. The question DOES NOT say how the credit say was recorded. Who's to sale its not an idiot fraudster who records a db AR and cr Sales? If that were the case, yes, the AR turnover would most likely decrease. Its very unlikely you will find a company that has higher AR than sales. As long as Sales>AR and both increase, the ratio will decrease!

REG - 82
AUD - 97
BEC - 81
FAR - 84
DONE!

[Anonymous]

I said A in the other thread and that is what I would stick with. I think it might be a bad question though

[Anonymous]

It's a bad question but D is very clearly correct. With A, you could see an argument either way but not D

[Anonymous]

Keep in mind, the MCQ is asking for the “best” answer. In this case, it's D. In the other question, it was A. That doesn't mean D is wrong in this scenario.

[Author]

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