Reference no: EM132828029

You are an auditor for a fast-growing manufacturing company considering doing an IPO in the very near future. The company uses the direct write-off method to account for uncollectible accounts receivables. The controller of the business does not understand why you are recommending the use of the allowance method and he claims that the direct write-off method is precise and more objective, where the allowance method involves judgement or guesswork. He also claims that since the amount of uncollectible accounts is fairly stable from period to period, the direct write-off method is just as good as the allowance method.

Problem 1: The owner has asked for a meeting to go over your recommendation. Explain in detail why the allowance method must be used to account for the uncollectible accounts receivable and why it is superior to the direct write-off method.