An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had 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 explanations most likely would satisfy the auditor?
A)The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
B)Twice as many accounts receivable were written off in the prior year than in the current year.
C)A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.
D)The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Question

Quizplus · Accepted Answer

The opening of a second retail outlet that generated an amount of credit sales similar to the established outlet would logically explain the doubling of the accounts receivable balance while maintaining a similar allowance for doubtful accounts percentage. This scenario suggests growth in sales and customer base rather than a deterioration in credit quality or collection issues.

An Auditor's Analytical Procedures Performed During the Overall Review Stage