In auditing the financial statements of companies which use computerized accounting systems, the auditors may find that this traditional (audit) trail is often obscured. Various techniques can be used in order to give the auditors greater assurance when the audit trail is lost. Required Explain the possible reasons and implications (audit) of significant changes in the following ratios when compared to the prior years ratios: The debtors turnover ratio has decreased over the year and the stock turnover ratio has decreased from the previous year‘s rate

(i) Debtors turnover ratio = Sales
Debtors

  • A decrease in debtors turnover means that debtors have risen faster than sales. This could be due to:-
  • Changes in sales mix
  •  Changes in credit terms
  •  Worsening economy or industrial conditions
  •  Changes in credit control department staffing
  •  Changes in customers
  •  Teeming and lading frauds taking place
  •  Cut-off errors
  •  Sales may have declined suddenly

Audit Implications

i) Recoverability of debtors becomes more doubtful as age of debtors increases. This could raise the need to increase the provisions for doubtful debts.

ii) Questions as to the completeness of sales ideally a growth in debtors should be a reflection of a growth in sales.

  • ii) Stock turnover ratio = Cost of sales
    Stock Possible reasons for the decrease:
    A new method of valuing stock may have been adopted
  • Sales may have declined suddenly
  •  Cut-off errors
  •  Increase in stock quantities perhaps due to bulk buying to obtain discounts
  •  Stock values and amounts incorrectly calculated
  •  Changes in types of stock held due to change in sales mix
    Audit Implication

i) Dead/ slow moving stock. There is need to review stock and possibly create a provision.



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