[silvercamaro77]

Can anyone help me understand this?

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.

Answer: 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.

I tried to figure this one out using hypothetical numbers and everything I did came up with a higher ratio instead of a lower one.

Net Credit Sales/ ((CY AR+ PY AR)/2) I used starting point of $200 sales/ ((400 CY AR+ 600 PY AR)/2)= 2/5

Fake sales recorded of $300 increases sales and CY AR $500/ ((700 + 600)/2) = 5/6

What am I missing?

AUD- 95
FAR- 75
BEC- 83
REG- 85

Officially done! Exclusively used NINJA for BEC, REG, and FAR

[NYCaccountant]

Fictitious credit sales would be a lower ratio:

Here is the entry:

AR Dr. 10,000

Revenue Cr. 10,000

Now say before we even include that sale, Average AR is 100,000 and sales is 500,000, which would mean a turnover of 5 (500,000/100,000), now we include the fictitious sale, AR is increased by 10k, so 110,000 and same for sales, which is now 510,000. 510,000/110,000= 4.63 decrease.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[silvercamaro77]

I think my problem is the starting point I used. If I flip my numbers around and use $500 sales and average of $100 for AR, it shows a decrease. If I flip your numbers around (100 sales and 500 average ar) the fictitious sales increase it. I'm just going to have to make sure to double check that I'm using a typical starting point.

I really appreciate your help!

AUD- 95
FAR- 75
BEC- 83
REG- 85

Officially done! Exclusively used NINJA for BEC, REG, and FAR

[CPA_TO_BE]

Will really appreciate the help here!

In Becker 2014

I see under “Further Audit procedure” —> Test of Details and Subsequent Analytical Procedure

but later in A4 I see another heading “Analytical procedure”.. is there a difference btw “Subsequent Analytical Procedure” and just “Analytical procedure”… sorry it may be a dumb question!

Thanks for the help!

REG: 86

AUD: Studying

[Author]

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