Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

What could a substantially lower accounts receivable turnover compared to the previous year suggest?

1. The client has cut back on credit policies

2. Fictitious credit sales were recorded

3. Employees are stealing inventory

4. An increase in legitimate sales

The correct answer is: Fictitious credit sales were recorded

A substantially lower accounts receivable turnover compared to the previous year typically indicates that the company is collecting its receivables more slowly than before. In this context, one plausible interpretation is that fictitious credit sales were recorded. If fictitious credit sales are included in the accounts receivable, this would inflate revenues without a corresponding increase in cash collections, leading to a lower turnover ratio. A significant reduction suggests that not all recorded sales are likely collectible, which can impact the accounts receivable balance negatively. Lower turnover can also be reflective of customers taking longer to pay their invoices or an increase in bad debt. However, the emphasis on the possibility of fictitious credit sales revolves around the manipulation of financial statements, where sales are overstated without actual cash inflow, resulting in receivables that are less likely to be realized.