You are the auditor of Foundry Inc., a company that manufactures chocolate bars and assorted candies. The description of the sales and collection cycle for Foundry is as follow:
Clients & Credit Limits
Foundry has 50 clients as they mostly sell to grocery stores' central purchasing departments or distributors. For each customer, Foundry performs a credit check prior to setting the credit limit for the client. The credit limit is reviewed each year.
In the past year, the credit limits were increased by 10%. This is due to the growth in product lines of Foundry and increased demand from customers. This also came at the same time the CEO of Foundry set the objective of growing the company's revenue by 25% over the next two years. Increasing the credit limit has helped Foundry move towards that objective.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is calculated by the controller by taking a percentage of the total sales for the month. The controller has been taking 3% of total sales. The estimate has not been revised in the current year, but it has always been sufficient to cover for any write-off incurred.
Required: For each of the two areas discussed above, identify the risk areas and the most likely misstatements for Foundry.
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