Patricia, a CPA, is the new controller for a small constructioncompany, Domingo Builders, that employs 75 people. The companyspecializes in custom homes greater than 3,500 square feet. Thedemand for large custom homes has significantly decreased becauseof the downturn in the economy. As a result of economic conditionstheir target market is dwindling, significantly affecting thecompany’s finances.
The ability to collect an outstanding receivable that issignificant and material is in doubt. Prior to year-end Patriciadiscusses the outstanding receivable with the CEO. Patriciabelieves that the company owing the outstanding receivable will notlast for another year. Patricia believes that the allowance foruncollectible accounts must be adjusted to a value that isreasonably realizable. The CEO disagrees.
The CEO is concerned that if the allowance adjustments are made,then Domingo will not look financially sound. Additionally, the CEOis concerned about the opinion that the auditor may provide as aresult of the allowance adjustment. Anything less than a “cleanopinion” would jeopardize Domingo’s ability to secure a much-neededbank loan. If the company cannot secure the loan next year, thenDomingo might be out of business too.
The CEO urges Patricia to ignore the allowance adjustment. Afterall, it is not certain that the outstanding receivable will beuncollectible; the company has not filed for bankruptcy. The CEObelieves that Domingo can just weather the storm and will recoverfrom the economic downturn. “I know business will pick up”.
Patricia reflects on what can be done. From her previousexperience in public accounting, Patricia reflects on the auditprocess and information that she thinks the auditors would need toknow.
