Final answer:
To verify the adequacy of the ADA, one should analyze historical percentage of sales, review the aged receivables listing, consider changes in customer creditworthiness and economic conditions, perform a roll-forward analysis.
Step-by-step explanation:
To determine the adequacy of the Allowance for Doubtful Accounts (ADA), several procedures should be performed. Firstly, analyze the historical percentage of sales that result in bad debt and apply this percentage to current period sales to assess if the ADA balance seems reasonable. Next, review the aged accounts receivable listing and estimate the likelihood of collecting on past due amounts. Accounts that are significantly past due might require a higher allowance.
Furthermore, consider any changes in customer creditworthiness, economic conditions, or company credit policies that could affect the future collectability of accounts receivable. A roll-forward analysis can also be utilized to determine the sufficiency of the ADA by considering the beginning balance, additions, write-offs, and recoveries during the period. Comparing the ADA balance to actual write-offs can provide insight into the accuracy of past estimates and inform about necessary adjustments.
Lastly, engaging in discussions with management about the credit risk and the adequacy of the allowance can provide additional qualitative information to support the assessment. Ensure that all assessments and procedures are thoroughly documented. If the existing ADA does not reflect the true estimate of uncollectible accounts, then adjustments should be made to correct the account balance.