Question

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to?

1) increase the balance in the allowance for bad debts account.
2) review the going concern ramifications.
3) require the entity to tighten its credit policy.
4) expand tests regarding the collectability of receivables.

Answer 1

The CPA would likely expand tests on the collectability of receivables to ensure they are reported at their net realizable value by analyzing collection patterns and debtor creditworthiness.

Step-by-step explanation:

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to expand tests regarding the collectability of receivables. This step involves conducting additional audit procedures to assess the risk that the receivables may not be collected, which ultimately affects the accuracy of the financial statements. The CPA would likely intensify the examination of individual receivables, evaluate the creditworthiness of debtors, and analyze collection patterns and historical write-offs. This careful scrutiny can provide a more precise estimate of the allowance for bad debts and ensure the receivables are reported at their net realizable value.