[jeff]

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Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[ruggercpa2b]

You've got this Amanda. It's better to be overprepared than to take chances. Good luck!

AUD - 73, 72 retake 7/2/2016
BEC - 8/20/2016
REG - TBD
FAR - TBD

I am so ready for this nightmare to be over. Been at this way too long.

[greg422]

Similar question as a couple days ago but Roger CPA had a different answer…

“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

Roger has the answer as D. This question came up a few days ago and we agreed A should be the answer. Increasing both sales and AR will decrease the turnover ratio because sales make up a larger portion of the ratio compared to AR. Does anyone else think Roger is incorrect?

Roger explanation:

Incorrect. Accounts receivable turnover is credit sales divided by average accounts receivable. It would be decreased by a decrease in credit sales or an increase in average accounts receivable. Lapping causes an overstatement of accounts receivable, which would decrease the turnover rate. Recording fictitious credit sales would increase sales and increase the ratio. Inventory does not affect the accounts receivable turnover ratio. A tightening of credit will result in a decrease in both sales and accounts receivable and could result in an increase or decrease in the turnover rate.

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

[Anonymous]

I think Roger is right. Lapping is when an employee stealing cash via AR. The employee is stealing the incoming payments and therefore, AR isn't going down as it should be. Lapping doesn't affect the sales balance at all, only the AR balance.

In order for the AR turnover to decrease from year to year, either the sales balance has to decrease or the AR balance has to increase. In this case, it's the AR balance increasing due to payments on AR being withheld, leading to a lower turnover year over year.

[greg422]

@Amanda take this as an example though:

Year 1 – Sales 500; Avg AR 100

AR Turnover = 5:1

Fictitious credit sales of $100 occur during year two:

Year 2 – Sales 600; Avg AR 200

AR Turnover = 3:1

So both sales and AR increase but proportionally the sales are higher, so the ratio decreases. Am I missing something? I'm pretty sure I've seen a Ninja question where they gave the explanation I just gave.

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

[Anonymous]

Lapping isn't fictitious sales. The sales don't increase at all- it's when an employee steals incoming payments so they are never recorded, leading to an overstated AR balance.

[Anonymous]

Oh wait, I see what you're trying to say. I didn't realize that you were saying you thought A was right over D. I would think that A would be wrong because AR doesn't stay constant so it's not going to increase at the same rate as sales, because of a fictitious sales being recorded. No company is going to give customers 12 months to pay, therefore, theoretically, I would think AR would stay pretty constant due to customers paying and fictitious credit sales being recorded.

I can see your argument though. I personally hate these kinds of questions because they are so tricky. Anyone else have input on this one?

[Anonymous]

I posted this on a new thread to see if anyone had input. I can see A being right too, the more I think about it….

[Anonymous]

@Greg problem solved:

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?

[Anonymous]

In a review/compilation, what are the rules for reporting fraud and illegal acts?

This is what I thought:

They must be reported to management if found, if they are consequential. If they are not consequential, it should not be reported.

There are no tests performed to detect fraud; only report if accountant happens to find.

[Anonymous]

I think you're right @CPAstudent

[koz124]

Credit sales would increase as would a/r…where else would you put the offsetting entry? You are not receiving cash.

Studying with Wiley Review, Wiley Test Bank, Ninja Audio.
Retakes with Ninja MCQ only...awesome!
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

[Anonymous]

Just curious, is anyone spending much time on ISAs? Becker has blurbs about them and mainly how they differ from SASs but there haven't been any MCQs on them.

[greg422]

In general I have found that ISAs seem to be less restrictive than SASs so I generally look for an answer that allows more than US GAAP would

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

[greg422]

In general I have found that ISAs seem to be less restrictive than SASs so I generally look for an answer that allows more than US GAAP would

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

[Anonymous]

@Greg on the turnover. If the turnover is at least 1:1, then your example calculation will be correct, any equal increase in numerator and denominator will result to decrease in the TO rate. However, if the ratio is less than 1:1, then equal increase in sales and AR will result to increase in TO. So not in all cases, A is correct. B & C are definitely wrong, so the only choice left is D which makes sense because the AR were not decreasing due to lapping.

[Author]

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