Finding Text
FINDING 2022-004 ? Calculation of Allowance for Doubtful Accounts for Receivables Condition Found: During our testing of accounts and notes receivable, it was noted that there were no calculation, schedule, analysis, policy or other supporting documentation for the allowances that are noted within the financial statements. In fact, the allowances as of June 30, 2022 have remained at the same level for the past few years. Criteria: The allowance for doubtful accounts should represent management?s estimate of the amounts that might not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. In accrual-basis accounting, adjusting the allowance for doubtful accounts at year-end improves the accuracy of financial reports representing a net realizable value for receivables. Cause: Due to staffing changes over past few years, the allowance for doubtful accounts had not been reviewed. Possible Asserted Effect: This resulted in an adjustment totaling $17,000 for the Schell notes receivable allowance. In addition, there could be potentially future material adjusting journal entry to the allowance balances for both tuition and Schell notes receivable if a policy and proper analyses are not performed by management. Repeat Finding: There was not a similar finding in the prior year. Recommendation: We recommend that management develop a method to determine an appropriate allowance for doubtful accounts estimation process methodology and consistently use it on a periodic basis, at least annually, to analyze whether an allowance should be recorded. There are several methods for management to use as an analysis to determine the appropriate allowance. We recommend that management consider the following methods: ? Management should develop an accounts receivable schedule that is categorized or based on days the receivable has been outstanding (30 days, 60 days, 90 days, 120+ days, one year, two, years, etc.). This will assist management to evaluate collectability based on how long the receivable has been outstanding. ? Comparing bad debt expense each year to write-offs during that year. Using this ratio over multiple years, rather than a single year could provide an useful method to calculate an accurate allowance. It is reasonable to expect the ratio of bad debt expense to write-offs to be close to 1.0 over an extended period. ? Comparing the beginning allowance for doubtful accounts to subsequent write-offs determines the adequacy of the existing allowance. Lower ratios indicate the allowance may be too low, while higher ratios may signify the accumulation of excessive allowances. Management Response: The School made the required adjustments to their accounting records The School is reviewing their accounting policies and procedures and the recommendations above. The School will update their procedures during the FY 2023.