ABC Corporation is under investigation for possible financial statement fraud. As part of the investigation, the forensic
Question:
ABC Corporation is under investigation for possible financial statement fraud. As part of the investigation, the forensic accountant has identified several anomalies in the company's financial statements. One of the anomalies is a significant increase in accounts receivable turnover ratio, which has gone from 5 to 9 over the last year. The forensic accountant suspects that the company may be overstating its accounts receivable to inflate its revenue. To investigate this suspicion, the accountant has obtained the following information:
Total sales for the year: $5,000,000
Beginning accounts receivable: $500,000
Ending accounts receivable: $600,000
Beginning inventory: $800,000
Ending inventory: $600,000
Cost of goods sold for the year: $3,000,000
(a) Calculate the accounts receivable turnover ratio for the current year and the previous year.
(b) Calculate the average collection period for accounts receivable for the current year and the previous year.
(c) Calculate the days' sales in inventory for the current year and the previous year.
(d) Based on the results of your calculations, do you believe that the company is likely overstating its accounts receivable? 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