CS Professional · Internal and Forensic Audit · Special Points relating to Internal Audit in various Entities
Internal auditors at Gupta Distributors, a trading entity, notice that sales returns are heavily concentrated in the last week of each quarter for a few dealers, with credit notes issued in the next quarter's first week and fresh invoices raised to the same dealers. Which risk does this pattern most strongly suggest?
The pattern suggests channel stuffing or window dressing of period-end sales. Sales are pushed to dealers before quarter-end, reversed by credit notes in the next quarter, and then re-invoiced. This inflates reported revenue temporarily. The auditor should test cut-off, dealer confirmations and approval of credit notes.
- AChannel stuffing or window dressing of period-end salesCorrect
- BUnderstatement of depreciation
- CDouble counting of purchase discounts
- DMisclassification of capital work in progress
Explanation
Sales booked near quarter-end, reversed by credit notes soon after and re-invoiced, is a recognised sign of inflating period-end revenue (channel stuffing or window dressing). The auditor should test cut-off, dealer correspondence and credit note approvals. The other options do not match the pattern of reversals.
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