Question

An auditor discovers that a client's accounts receivable turnover is substantially lower

for the current year than for the prior year. This trend may indicate that
(1) the client recently tightened its credit-granting policies.
(2) employees have stolen inventory just before year-end.
(3) fictitious credit sales have been recorded during the year.
(4) an employee has been lapping receivables in both years.

Answer 1

A lower accounts receivable turnover ratio may indicate slower collections, financial instability, or improper accounting practices like fictitious sales or lapping. Economic factors like interest rate changes also affect loan valuations, with lower rates increasing value and higher rates decreasing it.

Step-by-step explanation:

When an auditor notes that a client's accounts receivable turnover is significantly lower than the previous year, several implications can be considered. These implications can influence the valuation of loans or the perceived risk associated with them.

External economic factors such as interest rate changes can also impact the valuation of loans. As mentioned in d, if interest rates fall, existing loans may become more valuable if they were initiated at higher rates. Conversely, if interest rates rise, as noted in b, existing loans become less attractive.

These insights into risk and valuation relate to broader topics of liquidity, solvency, and economic conditions affecting a firm's operations, which can ultimately impact loan valuations and financial decision-making.