Chapter 6, Problem 71FF

a.

To determine

Introduction: Allowance for doubtful accounts is a contra asset account which is used to provide provision for losses which may result due to non-receipt of accounts receivables. The value of allowance is deducted from the figure of accounts receivables as presented in the balance sheet.

To describe: Basis for valuation of allowances for doubtful account, its comparison with account balances based on recorded transactions and precision requirement for balances containing estimates.

b.

To determine

Introduction: Uncollectible debt represent the debt which is not likely to be realized by the company, depending on the certainty of un-collectability, either an allowance (provision) can be made for the same or the debt can be written off by recognizing it as ‘bad debt’.

To describe:Information that the company may use to make the estimate of the allowance for uncollectible debt.

c.

To determine

Introduction: Audit Evidence refers to the evidence obtained by the auditor by performing audit procedures such as test of controls and substantive audit procedures. Audit evidence helps auditor to form his opinion to be expressed in the audit report which can be either modified opinion or unmodified opinion as the case may be.

To describe: Evidence needed to be collected by auditor in order to determine the fairness of client’s estimate of the allowance for uncollectible accounts.

d.

To determine

Introduction: When the allowance is estimated based on past trends, as a percentage of sales, the same rate cannot be taken in the current period since the customer base has been altered and therefore, management would have to determine a new methodology for estimation.

To discuss:Effect of sale to low credit customers on estimate of allowance for doubtful debt.

e.

To determine

Introduction: Economic conditions are the prevalent market conditions within which the business operates, a business can only operate profitably when the economic environment within which it exits, allows the business sufficient opportunities.

To describe: Importance of change in economic conditions in estimation of allowance for doubtful accounts.