A large amount of overdue accounts receivable on the books is a red flag of a fictitious revenue scheme.

• A. True
• B. False
• C. Not sure
• D. Cannot determine

Answer: (A)

A large amount of overdue accounts receivable signals potential problems with the revenue that was recorded. When revenue is fictitious, the company may have created receivables to prop up sales, but there is little or no real cash coming in. If those receivables are now overdue, it means the expected cash collection from those sales is unlikely or failing to occur. That mismatch between recorded revenue and actual cash collection is a classic red flag for fraudulent revenue schemes. In real, legitimate business, while some receivables can be past due, a material, sustained level of overdue balances suggests the revenue recognized may not have been real or fully collectible. Of course, there can be legitimate reasons for overdue AR, but the magnitude raises serious concern about revenue recognition.