Susan Start, a new staff assistant of a CPA firm, was -assigned to the audit team auditing the financial statements of Rel-Hep Finance Company. The senior in charge of the audit assigned Susan to the audit of the allowance for doubtful accounts.

During the course of this work, Ms. Start noticed that the allowance for doubtful accounts was only one percent of the accounts receivable balance, despite the fact that many large accounts were very old. She passed this information on to the senior who, in turn, asked the client about the low allowance percentages.

The client indicated that there was no problem, because the company's policy was to refinance slow-paying customers. For example, if Customer A had not made any recent monthly payments on a \(\$ 5,000\) one-year note, the company would refinance the note over a two- or three-year period, thus lowering the monthly payments. Generally, additional credit was not refused a customer, regardless of the status of payments on an existing account. The client maintained that this policy made possible a low allowance because few accounts had to be written off.

Required:

a. If you were suspicious of the small size of the allowance account, what evidence would you gather to verify or alleviate your suspicions?

b. With accounts constantly being refinanced, what evidence can be gathered to provide reasonable assurance that these accounts are collectible?