Question

6. How does management determine the valuation of the allowance for doubtful accounts? Does this process differ from account balances based on recording transactions, such as cash transactions? If so, how does it differ and how do you treat in differently in regard to audit evidence). 150 words minimum. -

7. What information should a company use to make the estimate of the allowance for doubtful accounts? 100 words minimum -

8. How important are changes in economic conditions to making an estimate of the allowance for doubtful accounts? Explain. 100 words minimum.

Answer 1

6. Detemination of valuation of Allowance for  doubtful Accounts : Doubtful debts arise in th business process which runs his business by giving credits to customer. When knowing thier trend of payments receipts over the credit period, credit worthiness of the organisation, they itself convert themselves into doubtful which means that receipt of money from their debtors is only doubtful. They( doubtful) not converted into Baddebts. Valuation for allowance of doubtful debts is depends upon past trends, market situation about the particular industry in which customer is running or doing business, Government regulations, Credit worthiness etc, all these factors need to be taken in mind for valuing the allowanc efor doubtful debts.

Recording transactions on cash basis means no credit will be forwarded or given to the customer. As Sale and purchases will be recorded once cash is received or payment is being made to the customer. So, situation of arise of doubtful debts is not possible in this kind of recordings.

Difference is very thin and simpy based on the credit forwarded to customer, in double entry system supplier may forward the credit and may not, and In case of cash basis, sale is recorded once cash is received. so situation of doubtful will not be arise.

PO / Invoice will act as Audit evidence as they proper credit period offerd to customer is mentioend therein. This helps to create data and analysis of the same will helps us determine the allowance for doubtful debts.

7. Information used to determine the Allowance for doubt ful debts: In order to valuing the allowance in precisely manner, the organisation has to analyse the last year financial bad debts booked, Allowance, Debtors list. It helps organisation to understand the debtors financial position and their credit worthiness. Analysis on data basis of Debtors list, Their payment trend list, Market conditions in which they are running business, new contracts undertaken factors need to be considered to determine for allowance of doubt ful debts. One can have well versed with its debtors and take external confirmation about the well being.

In order to determine precisely data need to be maintained in the begining, payments terms and recordings of payments, and analysis on quarterly basis of the paymens receipts from customers. It helps organisation to allocate Debtors into doubtful and bad debts.

8.  As Changes in economic conditions means changes in regulation, compliances etc as levied in the law of land by the governing body. Strict regulations, New levy, New technology within short span of time, will block the funds of the organisation to meet the compliance and regulation as " Cost of non compliance is more costly than its compliance, as non compliance will lead to lots of restrctions in future to deal with.

But yeah, same compliance will be applicable on all industry running in same economic conditioins but factor is flow of money within the organisation, same can be evaluated from payment trends of the organisation and if payment trend is not regular it will impact the working capital requirement of the supplier also, same will be doubt ful in other books might be.

From above it can be concluded that economic factor play vital role indetermining the allowance for doubtful debts.