Patricia, a CPA, is the new controller for a small construction company, Domingo Builders, that employs...

Patricia, a CPA, is the new controller for a small construction company, Domingo Builders, that employs 75 people. The company specializes in custom homes greater than 3,500 square feet. The demand for large custom homes has significantly decreased because of the downturn in the economy. As a result of economic conditions their target market is dwindling, significantly affecting the company’s finances.

The ability to collect an outstanding receivable that is significant and material is in doubt. Prior to year-end Patricia discusses the outstanding receivable with the CEO. Patricia believes that the company owing the outstanding receivable will not last for another year. Patricia believes that the allowance for uncollectible accounts must be adjusted to a value that is reasonably realizable. The CEO disagrees.

The CEO is concerned that if the allowance adjustments are made, then Domingo will not look financially sound. Additionally, the CEO is concerned about the opinion that the auditor may provide as a result of the allowance adjustment. Anything less than a “clean opinion” would jeopardize Domingo’s ability to secure a much-needed bank loan. If the company cannot secure the loan next year, then Domingo might be out of business too.

The CEO urges Patricia to ignore the allowance adjustment. After all, it is not certain that the outstanding receivable will be uncollectible; the company has not filed for bankruptcy. The CEO believes that Domingo can just weather the storm and will recover from the economic downturn. “I know business will pick up”.

Patricia reflects on what can be done. From her previous experience in public accounting, Patricia reflects on the audit process and information that she thinks the auditors would need to know.

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Expert Solution

ekkarill92 answered 2 months ago

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