Question

1. The client's sales have been decreasing due to increased competition in the industry. So, in 2015, the client increased its credit limits for all customers. Credit was also extended to new customers with lower credit ratings. Historically, the client's allowance for doubtful accounts (ADA) is calculated using the same percentages for each aging category. Is this a good approach for calculating the ADA as of March 31, 2015? Explain. 2. The aging %s used (corresponding to the "Days" column in the aging created in IDEA per the workbook) are 31-10%, 59-20%, 91-30%, 121-40%, and 121 + 100%. The client has recorded an ADA of $45,000. Is the client's ADA overstated (O/S) or understated (U/S)? Explain the basis for your conclusion. 3. The auditor believes that performing the analysis above provides evidence re: the assertions of Existence and Valuation for the ADA. Is the auditor correct? Explain. 4. If the High Value A/R were due from related parties, what would be the auditor's primary concerns regarding those A/R? Explain.

Answer 1

1..NO.

The possibility of full collection of the sale amounts billed to low-credit rated customers ,is obviously less than the high-credit rated customers.

Same % of ADA will be misleading & inaccurate , both, with respect to receivables outstandings as also the allowance created.

Utimately, the actually realisable receivables will also be incorrect.

Same holds good for calculating uniform % allowance for all age categories of pending receivables--as the more old the receivables, the less the possibility of collecting cash from them--if not totally bad, the more the chances of default & resulting uncollectibility.

2..
Days	Age
31	10%	450
59	20%	900
91	30%	1350
121	40%	1800
121+	100%	45000

The ADA -Allowance for Doubtful Accounts is overstated ,

as then, the entire receivables will be ADA, while

only the corresponding*the receivables amt. --ie. The total of which is only 4500 that is the correct ADA.

3.YES.

When analysing the above, the auditor ensures that actually the cutomer accounts EXIST

ie. When corroborated with customers' acknowledgement, he gets to know the existence of that particular customer, the date & amount of his billing , so that the days' pending can be ascertained

Based on the above, he is also able to form an opinion about the accuracy of the VALUATION of both the receivables & the ADA created

These opinions are adequate/otherwise evidence for his assertion about both the receivables & ADA balances , appearing in the balance sheet.

4.Auditor's primary concern:High Value A/R

1.That such a related party actually exists

2. Getting written detail from responsible top/senior management about :

its existence,

nature of the relationship,

approval to transact in a said business manner

any limit on the financial amount that can be transacted

as also a brief report of the transactions that took place during the time from the previous audit till the current period for audit.

3. All the above details need to be corroborated from responsible officials at the related-party's end also.

4. The auditor will also look into the past practices, accounting , allowance-procedures, if any , & collection details --all from both the records maintained.