Understanding the purpose of the Allowance for uncollectible Accounts account. A member of the Audit Committee of a firm asks the Chief Financial Officer the following question: “How do you know the Allowance for Uncollectible Accounts is adequate?” Discuss the adequacy or inadequacy of each of the following independent responses.
a. “I think it much more likely than not that the amount of cash and marketable securities is adequate to cover any cash shortage caused by customers’ not paying what they owe.”
b. “I have checked the Bad Debt Expense for sales made this past period and found the amount reasonable.”
c. “I have performed an aging of all accounts receivable for all sales this period and found the amount reasonable.”
d. “I have performed an aging of all accounts receivable and found the amount reasonable.”
e. “We performed a detailed confirmation of receivables from customers whose accounts the firm wrote off as uncollectible this period and found the decision to write them off suitable under the circumstances.”
f. “We performed a detailed confirmation of receivables from customers whose accounts the firm has neither collected nor written off by the end of this period and found the decisions suitable under the circumstances.”
g. “I know the Allowance account was correct at the end of last period, and I checked the Bad Debt Expense for this period using a percentage of sales recommended for this class of customers by the top two credit reporting agencies.”