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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

Reviewing Bharat Chemicals Ltd, the auditor observes that revenue has risen sharply in the last quarter while operating cash flow has fallen, trade receivables days have lengthened, and several large sales were booked on the last two days of the year with returns in the first week of the next year. Which conclusion is most appropriate?

The pattern points to possible revenue manipulation. Rising sales with falling operating cash flow, longer receivable days and year-end sales reversed early next year are classic red flags, so the auditor should test cut-off and subsequent sales returns instead of relying on the higher profit.

  1. AThese are red flags of possible revenue manipulation, needing cut-off and sales-return testingCorrect
  2. BThe company has improved its credit collection efficiency
  3. CThe pattern indicates understated revenue to reduce tax
  4. DNo further work is needed because profits have increased

Explanation

Growing revenue with falling cash flow, rising receivable days and year-end sales reversed soon after are typical signs of fictitious or premature revenue recognition. Collection efficiency would reduce receivable days, not lengthen them. The auditor should perform cut-off tests and examine post-year-end credit notes, as higher profit does not remove the risk.

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