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CS Professional · Internal and Forensic Audit · Internal Audit of Specific Functions

Near the quarter end, Rohan Pharma Ltd records large sales to a few distributors, and many are followed in the next quarter by credit notes and goods returns. Which risk should the internal auditor primarily suspect?

The auditor should suspect channel stuffing, meaning premature or inflated revenue recognition to meet targets. Large period-end sales to distributors that are reversed through returns and credit notes in the following quarter indicate a cut-off problem and possible revenue manipulation.

  1. AChannel stuffing or premature revenue recognition to meet targetsCorrect
  2. BUnder-reporting of employee attendance
  3. COverstatement of cash in transit from bank transfers
  4. DMisclassification of capital work in progress

Explanation

Heavy sales pushed to distributors just before period end, then reversed by returns and credit notes, is the classic pattern of channel stuffing or cut-off manipulation to inflate reported revenue. The other options concern payroll, cash and fixed assets, which the pattern does not suggest.

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