[md27]

Hi All,

I’ve been studying for AUD, and have made a few posts lately with questions. I’m reviewing the chapter 4 module on the revenue cycle and it mentions that a fraud risk is that the company fails to record sales returns. I get it. It makes sense that it’s a risk especially if the sale was made on credit as they could not record the return and keep their AR and Revenue overstated. What happens to the inventory that was returned? Do they keep that off the books as well? If not, how do they sneak that back into the books?

[Anonymous]

It's not really concealable because eventually there will be a (serious) discrepancy between AR and cash, so I think it would be mostly useful for temporarily overstating current period income only.

[md27]

Thanks for the response! Not sure what you mean by there being a discrepancy with AR and cash? I think the risk is mainly with sales on credit because there wouldn't be any cash having to be returned to the customer if it was a sale on credit and not yet paid. It would be the Company acting as if nothing happened which would mean revenue and AR are overstated. I'm just not sure what the Company does with the returned inventory, were this to happen?

Also, what happens when they record fictitious sales overstating revenue and AR? Because eventually it'll have to get treated as a bad debt expense, lowering revenue and AR, right? Do they just perform this in another period?

[Anonymous]

Oh right, AR is a current asset so it could potentially remain overstated. I just meant that not recording returns would result in cash receipts not matching credits posted to AR.

[Author]

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