[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]

from another forum:

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

Fictitious credit sales have been recorded during the year

Employees have stolen inventory just before the year end

The client recently tightened its credit-granting policies

An employee has been lapping receivables in both years

Answer:

A

Explanation:

A/R turnover is the number of times that the A/R balance is collected during the year. Fictitious sales increase A/R, but leave collections the same, so A/R turnover decreases. A/R turnover would be unaffected by current inventory levels. Tightening credit-granting policies would tend to increase A/R turnover. Lapping receivables in two years would result in both years’ receivables being misstated, but unless the volume of lapped amounts changed, turnover would not be affected.

[Anonymous]

Right, I know but what I'm saying is that the question is asking for the best possible answer. Just because in the question you posted above, A is the correct answer, doesn't mean its the best answer for the other question.

[Anonymous]

How is D clearly stated. If someone is doing the same thing in 2 years why would there be a difference in Y2 vs Y1

[Anonymous]

Because AR would continue to go up, year after year…..

The company would continue to make sales on credit, increasing AR, and the employee lapping would continue to steal customer payments, so AR wouldn't decrease appropriately. Therefore leading to an increase year over year.

[koz124]

MOD – I don't really get your entry. If it is a fictitious sale, there is no real money, so there would be no bank accounts involved. It would have to hit a/r or something other than a bank account in order for daily cash ledgers and other reconciliations not to discover it.

Studying with Wiley Review, Wiley Test Bank, Ninja Audio.
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Far - 1/28 72, 7/22 79
Aud - 2/28 70, 8/14 83
Bec - 4/10 80
Reg - 5/30 64, 7/2 82

[thehip41]

This is not a bad question at all, the answer is very clearly D.

B is non sense, C would increase the ration

With A, if you add false sales, you are going to increase the numerator, 100% of the time.

Increase the numerator, increase the ratio.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Anonymous]

This question clearly sucks. There are other posts on A71 about this exact question and people not understanding it. Clearly, nothing this unclear will be asked on the exam

[M.O.D.]

@ Koz

Comptronix corporation's fraud:

1. Company made fictitious asset purchases

2. It issued checks to pay for them.

3. It created fictitious sales

4. It used the checks issued to pay for the assets to collect on the sales.

p 601 Arens, Auditing and Assurance services

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)

[thehip41]

@amanda

You may think the question sucks, but they are asking for the best answer. This is what Audit is: here's a question with 4 right answers, pick the one that is most right.

Looking at those answers, A is the obvious most right answer.

With A, when you fake sales, the ratio goes up 100%.

With D, when that scenario happens, the ratio may or may not increase.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Anonymous]

@thehip41- I literally posted the exact same thing about 6 posts above- they're asking for the “best” answer. I also said that I think A is the right answer.

[greg422]

To rehash this debate again, I just got this question in NINJA with both the ficticious credit sales and lapping as choices. I chose lapping and GOT IT WRONG! I'm convinced this is just a TERRIBLE question.

You answered D. The correct answer is 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.

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

[Anonymous]

Greg, I did a sim in Becker that referenced the AR turnover going going down year over year due to fictitious sales being recorded because AR would continue to go up because they would never be collected.

It's a bad question for sure

[Anonymous]

it came up in a different ninja answer as an aside. it makes sense to me, the lapping this does not at all. I think it isn't a great question but the only thing that makes sense (to me) is A

[Anonymous]

In my understanding, fictitious “credit sales” means you will debit AR (which is also fictitious) and credit Sales for the same amount. If the question specifies that the ratio is at least 1:1 then A is also correct, TOR will decrease (500/100=5, 600/200=3). However if the TOR is less than 1:1 then any increase in AR and Sales will increase TOR (100/500=0.20, 200/600=0.33). So A is not always correct.

Answer D is the best answer since lapping only affects the denominator (AR account) and the AR balance will only go on an upward direction, so that means it will decrease the TOR, but never will increase it in any given situation.

[Anonymous]

This is a question that can be looked at from a distance, rather than just using numbers. The point of A/R Turnover is to see how quickly payments are being received for credit sales, correct? So if fictitious sales are recorded, payment is never going to be received, which would show as a decrease in A/R Turnover. An increase in AR Turnover, means that the A/R is being “turned over” more quickly, which is a good thing. A decrease in A/R turnover means that payment is being received on a less timely basis (or in this case, never).

[Author]

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