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1. Identification and Summary of Corroborative and Contradictory Audit Evidence

The management of the commercial furniture wholesaler asserts that the reporting entity calculates its allowance for doubtful debts based on standard reserve percentage consistent with its historical collection experience. Additionally, the receivable valuation basis is said to conform with the Accounting Standards Update (ASU) No. 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

Corroborative Audit Evidence

The reserve percentage of gross receivables is consistent year over year, which gives evidence of a stable estimation method and comparability. Bad debt expense has equally remained consistent as a percentage of revenue, which provides evidence of comparability of prior estimates. Retrospective review of collections indicates accuracy of historical reserve, which seems to confirm the effectiveness of past reserves.

The management of the furniture wholesaler applies the same estimation process as prior years in conformance with ASU 2016-13, which supports consistency in valuation methodology and compliance with established accounting standards.

Contradictory Audit Evidence

An in-depth analysis of the scenario would give some evidence that do not support the standard reserve valuation method adopted by the furniture wholesaler. The business has witnessed increasing revenues and receivables as a result of the introduction of a new product line. Such a change in product mix may not be adequately provided for using standard reserve rates. It is equally stated that new customers in the restaurant industry are reputed for higher default rates, culminating in a heightened credit risk. The implication of heightened credit risk is that existing reserve percentage may underestimate allowance for doubtful debts.

Additionally, the reporting entity does not have historical collection data for restaurant customers, which impacts the reliability of existing reserve method. It is said that sales are now more frequently wholly financed, which results in increasing exposure to bad debts. Meanwhile, the fact that the industry has higher reserve percentage for similar customer base gives an indication that the standard reserve valuation method may be inappropriate, and reserve may be understated. Moreso, volatility in economic conditions and uncertainty in future collections seem to contradict the existing standard reserve methodology.

2. Additional Information needed to reach a conclusion on Management's Assertion

In order to properly assess the adequacy of the allowance for doubtful accounts, more information would be needed. There is a need for information on aging analysis of account receivables by industry or product line in a bid to evaluating reserve adequacy for a high-risk industry like the restaurant industry. Also, there is a need for collection data for new customers or early payment trends in order to assess the true credit behavior of the new customer base.

Reserve modeling sensitivity analysis would be required to understand potential reserve levels under different loss scenarios. Additionally, credit approval documentation for new product line customers would be required to verify if credit standards were properly applied to new, yet riskier customers. Benchmarking analysis against industry peers would be needed with a view to evaluating if management's reserve is consistent with that of peers facing similar risks.

3. Assessment of Current Reserve Method

Management's assertion to the effect that the reserve is adequate based on historical reserve percentage may not be fully supportable against the backdrop of the facts of the case. The existing reserve method does not seem to adequately capture the significant shift in risk profile resultant from the entry into a new industry (restaurants) with higher credit risk coupled with limited collection experience. Although historical data and consistency seem to support the current estimation process, the change in the nature of receivables brings with it new risk variables that the current methodology may not likely capture.

Nonetheless, additional information may alter the foregoing conclusion. If collection data give an early strong payment performance, and updated receivable aging report indicates fewer delinquent accounts, this would likely support the assertion. If benchmark data and sensitivity analyses reveal the reserve is materially above the industry, the assertion would be supportable.