Question

Referring to your make believe business that were used to answer the previous the Sarbanes-Oxley Act emphasizes how important Internal Controls are and the penalties that can be imposed on a company for not following good internal control practices. Please answer the following questions regarding Internal Controls discussions, which collection method would you adopt for your business and why?

How do you determine what amount of receivable would be uncollectible? How often would that amount be adjusted? Who should make that decision?

Answer 1

Collection method adopted by business

• Hiring of collection agency for collection from accounts receivable(factoring arrangement)
• Send reminder to customers time to time by email
• If no response of mail then contact by call and talk in professional manner.
• Rescheduling of payments.
• Make negotiation with customers by relaxing payment terms.For example offer discount.

Determination of uncollectible accounts receivable

• If customer become insolvent or bankrupt,there is 100% probability of being uncollectible.
• Credit rating/credit score of customer can be analysed for determination of collectibility.
• It can be determined by preparing ageing report.Ageing report classify customer accounts on the basis of time period for which payment is due from customer.
• Average collection period shows the time period for which payment is due from customer.
• There is no response from customer even after frequent efforts of business organisation.

Amount is written off as bad debt (expense) in income statement.On the other side balance of accounts receivable get reduced.

Financial management is authorized to make decision.

Management having power to make decisions regarding financial matters or having expertise in this field .