The auditor of Kaefer Manufacturing uses regression analysis during the analytical review stage of the firm’s annual audit. The regression analysis attempts to uncover relationships that exist between various account balances. Any such relationship is subsequently used as a preliminary test of the reasonableness of the reported account balances. The auditor wants to determine whether a relationship exists between the balance of accounts receivable at the end of the month and that month’s sales. The file P11_51.xlsx contains data on these two accounts for the last 36 months. It also shows the sales levels two months before month 1.
a. Is there any statistical evidence to suggest a relationship between the monthly sales level and accounts receivable?
b. Referring to part a, would the relationship be described any better by including this month’s sales and the previous month’s sales (called lagged sales) in the equation for accounts receivable? What about adding the sales from more than a month ago to the equation? For this problem, why might it make accounting sense to include lagged sales variables in the equation? How do you interpret their coefficients?
c. During month 37, which is a fiscal year-end month, the sales were $1,800,000. The reported accounts receivable balance was $3,000,000. Does this reported amount seem consistent with past experience? Explain.