An auditor has determined that a client's 'days in receivables' ratio has slowly increased over the last three years.Which of the following could be a possible reason for this?
A)The client has hired a collection agency which is extremely efficient at collecting.
B)The receivables have been secured as collateral for a recent capital asset purchase.
C)The accounts receivable department has implemented a new IT system, making collections much quicker and more efficient.
D)The accounts receivable turnover ratio has decreased due to poor internal controls related to credit granting procedures.

Question

Quizplus · Accepted Answer

An increase in the 'days in receivables' ratio indicates that it is taking longer for the client to collect their accounts receivable. If the client's internal controls related to credit granting procedures are poor and they are granting credit to customers that are not paying on time, this could result in a decrease in the accounts receivable turnover ratio and an increase in the 'days in receivables' ratio. Options A, B, and C all suggest that collections are becoming more efficient, which would have the opposite effect on the 'days in receivables' ratio.

An Auditor Has Determined That a Client's 'Days in Receivables