Audit and Assurance Practice Exam

If an auditor notices that the inventory turnover is decreasing, what is a possible interpretation?

1. Sales are declining

2. Production is managing supply well

3. Costs are being controlled effectively

4. Demand for products is stable

The correct answer is: Sales are declining

A decreasing inventory turnover ratio suggests that a company is taking longer to sell its inventory. This trend often indicates that sales are declining, as it implies that goods are not moving off the shelves as quickly as they previously did. When inventory turnover decreases, it may mean that either the company is experiencing weaker demand for its products or it is stockpiling products due to anticipated future sales, which may not align with current market conditions. In contrast, the other interpretations do not align with the implications of decreasing inventory turnover. If production were managing supply well, the inventory turnover ratio would likely remain stable or increase as products are sold effectively. Effective cost control typically would not directly impact the turnover ratio; rather, it relates more to the efficiency of operations rather than sales performance. Stable demand would lead to consistent inventory levels and turnover, not a decline. Therefore, the drop in inventory turnover primarily indicates a potential decline in sales.