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NEW QUESTION: 1
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. Obsolete inventory has not yet been reduced to fair market value.
B. The aging of accounts receivable was improperly performed in both years.
C. There was an improper cutoff of sales at the end of the year.
D. An unusually large receivable was written off near the end of the year.
Choice "B" is correct. Accounts receivable turnover is calculated as sales / receivables. A decline in this
ratio may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales
made at the beginning of the subsequent year were inadvertently recorded in the current year, both sales
and receivables would be overstated by the same amount. This would generally result in a larger
proportionate effect on receivables (since the receivables balance is smaller than sales for the year), and
an overall decrease in the ratio.
Choice "A" is incorrect. Failure to write down obsolete inventory would not affect sales or receivables, and
so would have no effect on accounts receivable turnover.
Choice "C" is incorrect. Write-off of an unusually large receivable would reduce the receivables balance
without affecting sales. This in turn would cause an increase in accounts receivable turnover.
Choice "D" is incorrect. The aging of accounts receivable does not affect the overall receivable balance,
and therefore would have no effect on accounts receivable turnover.