ABC Corporation has been accused of fraudulent financial reporting, specifically overstating its revenue. As a forensic accountant,
Question:
ABC Corporation has been accused of fraudulent financial reporting, specifically overstating its revenue. As a forensic accountant, you have been asked to investigate the company's financial statements and determine whether there is evidence of such fraud. You have obtained the following financial information for the current year:
Sales revenue: $10,000,000
Beginning accounts receivable: $1,000,000
Ending accounts receivable: $1,200,000
Beginning allowance for doubtful accounts: $100,000
Ending allowance for doubtful accounts: $120,000
Using this information, answer the following questions:
(a) Calculate the accounts receivable turnover ratio for the current year. Interpret the ratio and explain what it indicates about the company's accounts receivable.
(b) Calculate the allowance for doubtful accounts ratio for the current year. Interpret the ratio and explain what it indicates about the company's allowance for doubtful accounts.
(c) Calculate the percentage of sales method for estimating uncollectible accounts for the current year. Interpret the ratio and explain how it can be used to identify potential fraudulent activity.
(d) Based on your analysis, do you believe that ABC Corporation is likely overstating its revenue? Explain your answer.
Note: Round all ratios to two decimal places.
Auditing a risk based approach to conducting a quality audit
ISBN: 978-1133939153
9th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg