Question

explain a sound control over a public company's process for controlling the appropriateness of the allowance for doubtful accounts.

Answer 1

Controls for allowance for doubtful accounts :-

Controls of the estimation techniques of the allowance for doubtful debts :-

Risk classification. assign array score to each customer and assume a higher risk of default for those having a higher risk score.

Historical percentage, if a certain percentage of account receivables became bad debts in the past, then use the same percentage in the future. This method works best for large numbers of small account balances

Pareto analysis,. Review the largest accounts receivables that make up 80 percentage of the total receivable balance, and estimate which specific customers are most likely to default. Then use the proceeding historical percentage method for the remaining smaller accounts. This method works best if there are a small number of large account balances.

you can also evaluate the reasonableness of an allowance for doubtful accounts by comparing it to the total amount of seriously overdue account receivables which are presumably not going to be collected. If the allowance is less than the amount of this overdue receivables then the allowance is probably insufficient.

companies have been known to produce an entry alter their financial results by manipulating the size of allowance. auditors look for this issue by comparing the size of the allowance to gross sales over a period of time, to see if there are any major changes in the proportion.

Auditors will do the following activities regarding to the verification of the allowance for doubtful accounts :-

Review the process followed by the company for estimation of the the allowance for doubtful accounts and the auditor will compulsorily compare the percentage of doubtful assets against the account receivables from year to year and also verify the original amount of account receivables by using the external confirmations.

The linkage between the value of the account receivables and allowance for doubtful accounts will be cross checked by the auditors.

These points to be considered while framing the controls on allowance for doubtful accounts.

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