Question

An auditor has determined that a client’s ‘days in receivables’ ratio has slowly increased over the last three years. Which of the following could be a possible reason for this?

		A. The client has hired a collection agency which is extremely efficient at collecting.
		B. The receivables have been secured as collateral for a recent capital asset purchase.
		C. The accounts receivable department has implemented a new IT system, making collections much quicker and more efficient.
		D. The accounts receivable turnover ratio has decreased due to poor internal controls related to credit granting procedures.

Answer 1

The answer is option D - The accounts receivables turnover ratio has decreased due to poor internal controls related to credit granting procedures.

If 'days in receivables' ratio has slowly increased over a period, that means that the company is not able to collect its receivables on time which is mostly due to the poor internal controls related to credit granting procedures. It suggests that the company is finding it difficult in making collections from its customers.