Question

With respect to the write-off of an uncollectible account receivable against the allowance for bad debts, a sound system of internal control would require?

1) the write-off be approved by two employees.
2) an investigation of why credit was extended to this customer in the first place.
3) a lawsuit to be initiated to recover the uncollectible amount.
4) the write-off to be made within six months after the date of sale.

Answer 1

A sound internal control system for writing off uncollectible accounts receivable typically involves a two-person approval process to prevent fraud and ensure the accuracy of financial transactions.

Step-by-step explanation:

With respect to the write-off of an uncollectible account receivable against the allowance for bad debts, a sound system of internal control would likely require that the write-off be approved by at least two employees. This two-person approval process is an essential part of a system of checks and balances which helps to prevent fraud and ensure accuracy in the handling of financial transactions.

While an investigation into the reasons for the credit extension could be beneficial for internal process improvement, it is not typically a direct control mechanism for the write-off process itself. Initiating a lawsuit is generally a management decision based on cost-benefit analysis and not part of routine internal controls. There's usually no specific time frame, such as six months, mandated for the write-off timing within internal control systems. Instead, companies regularly review their receivables and perform write-offs based on their own credit policies and the specific circumstances of the receivables.