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Hi, It’s my first time posting so pardon me if it’s not the right way/place to post this question
I’m currently doing question 69 page 29
The gist of the scenario related to the question is:
Preliminary analytical procedures have been performed from the most recent management accounts and the following ratios calculated:
Gross profit margin has decreased from past year
Payables payment period has decreased from past year
Receivables collection period has increased from past yearQuestion 69:
Which audit risk can be identified from the ratios above?Answer:
Gross profit decreased: Website sales may not be completely recorded
Payables payment period decreased: Payables may not be completely recorded
Receivables collection period increased: Receivables may be overvaluedI’m wondering why it cant be this answer instead:
Gross profit: Website sales may not be accurately recorded
Payables: Payables may not be accurately recorded
Receivables: Extended credit terms may have been given to the customersAnswer at the back said that extended credit terms is not an audit risk
But I’m wondering if “not accurately recorded” is not the correct audit risk at all for both gross profit and payables in this case?Please help me understand this
Thanks for your help!Welcome to my AA forum! Apologies that I didn’t see your post sooner but I am currently on vacation.
I can’t see any ratios in your post and don’t have any books with me but will try and answer.
If GP has fallen either revenue is lower or cost of sales higher. Revenue will be lower if it is not completely recorded i.e understand. “Not accurately” could also result in overstatement (so is not correct.)
GP will also fall if costs increase e.g due to inflation and cannot be passed on to customers. That is not a RoMM … that is a fact. Similarly, extending credit to customers is not, of itself, RoMM.. … it is a fact.
However, an increase in the receivables collection period may signify a RoMM because the allowance for credit losses (“bad debts”) may be insufficient I.e understated.
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