ALLOWANCE FOR BAD DEBTS
- Ascertain the company’s policy of providing for allowance for bad debts by examining minutes of meetings and other documents.
- Compare balances in the allowance account with that of the preceding years. Investigate significant changes.
- Evaluate the reasonableness of the allowance by computing the ratio of the balance of allowance for bad debts to the trade accounts receivable balance.
- Compute the ratio of bad debts expense over sales. Analyze if such is reasonable.
- Review the aging schedule of accounts receivable.
- For accounts written off which were charged to expense, examine minute book for authorization to write off accounts.
- Ascertain that accounts written off are worthless by examining supporting documents such as reports of collection agencies, correspondence with said customers and documents filed in court, and court decisions on collection cases.
- If possible, check the financial status of the customers for which allowance for bad debts was provided.
- Check entries to the allowance account for possible bad debts recoveries and trace if the same were declared as income at the time of recovery.
Reference: RAMO 1-2000