Question

In auditing sale and cash collection cycle, you noted the following changes in ratios:                                                      

                                                                        Current         Last Year

       Accounts Receivable Turnover                   2.8                    6.3

       Gross Profit                                                         15%                   8%

You decided to collect more evidence and then found the following:

                                                                                     Current         Last Year

        Inventory Turnover                                       7.3                    4.2

With these data, as the auditor, what would you conclude and what would you do next?

Answer 1

There is an Decrease in Accounts Receivable Turnover compared to last year.

But, the Gross profit % has increased compared to last year.

There is a doubt with regard to this as the accounts receivable turnover has decreased how the gross profit has increased, this is possible only when there is a change in credit policy by the company.

But, the Inventory Turnover has increased over the year, that means the Inventory is piling up in the company.

That means the company has not making enough sales, so the accounts receivable turnover has reduced.