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Which of the following is a valid explanation for the INCONSISTENCY between the results of the analytical procedures on trade receivables and the directors’ statement regarding debt collection problems?
A A change in sales mix towards high value products
B An increase in the proportion of cash sales since August 20X8
C An increase in the rate of sales tax in September 20X8
D Sales growth of 1% per month over the yearHello sir ,
this past paper says answer is B with a reason being cash sale and i agree with it.
But i cant understand why is A wrong
If sales mix changed and they start selling expensive products receivables will increase – why is it not the answer ?again in D, if sales have grown that will increase receivables and can be a reason for this inconsistency right
Per analytical procedures, trade collection period is LOWER i.e. fewer days. For the purpose of this explanation SUPPOSE that this is 25 days compared to 30 days at the interim.
The director says there is difficulty with debt collection – so you would be expecting a collection period of more than 30 days.
The inconsistency then, is that days have fallen when you expected them to increase. Now think of the calculation of debtor days, so at the interim: Trade receivables balance/Revenue x 365 = 30 daysAll the alternatives – A, C and D increase revenue and trade receivables. They don’t have any effect on how quickly or slowly credit customers are paying. Only B will shorten the average number of days because cash sales are in revenue but not in trade receivables.
What the auditor should of course now do is calculate receivable days based on revenue from sales on credit ONLY (i.e. excluding cash sales) to remove the distortion.
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