Montgomery Manufacturing Inc. sells household appliances to specialty retail sto

Question

Montgomery Manufacturing Inc. sells household appliances to specialty retail stores and large department store chains extending that 30 day credit terms to all of its customers. During 2012 Montgomery sales slowed considerably due mainly to competitive pressures faced by it smaller customers as they struggle to compete against online stores selling less-expensive products from lower-cost manufacturers. In preparation for Montgomery's December 31, 2012 year and, Sue, Montgomery'scontroller prepared an analysis estimating the collectibility of Montgomery's Accounts Receivable by age category. The results of series analysis along with the estimate is used in prior years are as follows; Age of account receivable. Sues analysis. Amount used in prior year 0-30 days past due. .95. .98 31-60. .88. .90 61-90 .75. .80 Grater than 90. .10. .15 As of December 31, 2012 in aging of Montgomery's accounts receivable resulted in the following. Age of account receivable. Amount 0-30 days past due. $500,000 31-60. $ 240,000 61-90. $85,000 Grater than 90 days. $25,000 Total balance. $850,000 The balance of Montgomery's allowance for collectible accounts in 12/31/12 is $12,500 credit balance. Also in the last week of December 12 Montgomery was informed that one of its customers, acme housewares has filed for bankruptcy and it is very unlikely that Montgomery will collect it's Acme housewares account receivable. The amount of Acme household account receivable balance was $40,000 which resulted from a sale made to Acme on October 15, 2012. As of December 31, 2012 no adjustment has been made for the Acme housewares account. During the first week of January so met with Montgomery's cfo to inform him of the Acme warehouses information and to present her analysis regarding the probability of accounts receivable collections. Jack argued that Montgomery needed every possible penny of earnings for 2012 and stated that consistently it would prohibit revising any estimates for the current year. Also he stated that nothing should be done regarding Acme warehouse is account until a final sentiment settlement of the acme of bankruptcy is made, which could take as long as 2 or three years. Requirements 1. Prepare the adjustment if any that sue should make for the Acme warehouses account in the year and adjusting entry to record bad debt expense. 2. If Sue decides not to follow the CFo guidelines regarding acne warehouse and the revision of the collectibility estimates, how will her calculation of bad debt expense differ from the CFOs? Be sure to specify the amount of the difference. 3. Regardless of your answers in 1 and 2 if Sue believes that the CFO guideline is incorrect how should she proceed? Should she record the adjustments as stated by the CFO or should she take another course of action? Explain your answer.

Explanation / Answer

The auditor's objective in an audit of internal control over financial reporting is to express an opinion on management's assessment of the effectiveness of the company's internal control over financial reporting. To form a basis for expressing such an opinion, the auditor must plan and perform the audit to obtain reasonable assurance about whether the company maintained, in all material respects, effective internal control over financial reporting as of the date specified in management's assessment. The auditor also must audit the company's financial statements as of the date specified in management's assessment because the information the auditor obtains during a financial statement audit is relevant to the auditor's conclusion about the effectiveness of the company's internal control over financial reporting. Maintaining effective internal control over financial reporting means that no material weaknesses exist; therefore, the objective of the audit of internal control over financial reporting is to obtain reasonable assurance that no material weaknesses exist as of the date specified in management's assessment. 5. To obtain reasonable assurance, the auditor evaluates the assessment performed by management and obtains and evaluates evidence about whether the internal control over financial reporting was designed and operated effectively. The auditor obtains this evidence from a number of sources, including using the work performed by others and performing auditing procedures himself or herself. 6. The auditor should be aware that persons who rely on the information concerning internal control over financial reporting include investors, creditors, the board of directors and audit committee, and regulators in specialized industries, such as banking or insurance. The auditor should be aware that external users of financial statements are interested in information on internal control over financial reporting because it enhances the quality of financial reporting and increases their confidence in financial information, including financial information issued between annual reports, such as quarterly information. Information on internal control over financial reporting is also intended to provide an early warning to those inside and outside the company who are in a position to insist on improvements in internal control over financial reporting, such as the audit committee and regulators in specialized industries. Additionally, Section 302 of the Act and Securities Exchange Act Rule 13a-14(a) or 15d-14(a), 1/ whichever applies, require management, with the participation of the principal executive and financial officers, to make quarterly and annual certifications with respect to the company's internal control over financial reporting.

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