Reference no: EM132733723

Question - It is February 16, 2018, and you are auditing Davenport Corporation's financial statements for 2017 (which will be issued in March 2018). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenport's accounts receivable is $50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss on doubtful accounts for 2017 might be appropriate. Jim replies, "Why should we make an adjustment? Ted Travis, the president of Travis Company, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2018, so let's wait and see what happens; we can always make an adjustment later this year."

Required - In your position as the external auditor of Davenport Corporation, prepare a memo to Jim Davenport and address the following:

1. The ethical issues you both face.

2. The major stakeholders involved and state how the stakeholders would be affected by the course of action suggested by Jim Davenport.

3. Explain why you believe the course of action proposed by Jim Davenport is ethical or unethical.

4. Explain the proper accounting treatment and support your answer with appropriate authoritative citation.