Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client Explanation: s would satisfy the auditor?

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Choice "C," is correct. I,f a second, similar retail outlet was opened, one would expect sales and accounts receivable to double. A,s long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same. C,hoice "A," is incorrect. I,f more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts. C,hoice "B," is incorrect. I,mproved control activities related to the recording of cash receipts might result in a decrease in accounts receivable in the current year as compared to the prior year, not an increase. I,n addition, improving such controls would not be likely to affect the allowance for doubtful accounts as a percentage of receivables. C,hoice "D," is incorrect. I,f the client sold less merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the lower level of estimated bad debts.

Analytical Procedures Performed During an Audit Indicate That Accounts Receivable