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Hello. Question : Trade receivable.
Encore co credit controller left the company in January 20X5 and has only recently been replaced. The trade receivable collection period increase from 49days as at 31dec 20X4 to 66days as at 30 April 20X5. Year end Trade receivable amounted to 9.1$m (20X4 : $142000) has been made.The answer : substantive procedure for TR : Discuss with the finance director the rational for maintaining the allowance at the same level in light of the increase in the receivable collection period and the absence of a credit controller.
Im unable to understand this test. Can you please explain?It would have been clearer if it had said to enquire into the reason why the allowance has not been increased. It seems likely that the absence of a credit controller has contributed to the increase in the average collection period – so the likelihood of bad debts has increased – and management should at least be assessing whether the allowance for credit losses (“bad/doubtful debts”) needs to be increased so that trade receivables are carried in the statement of financial position at their (estimated) recoverable amount.
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