Crescent City Fun Park (Crescent City), an amusement park with thrilling rides and a water park, sells tickets onsite and has a website that allows customers to purchase tickets in advance and bypass the long lines. Customers who use the website include the general public and travel agents. Both individuals and travel agents can purchase tickets online using a major credit card. Some travel agents prefer the option of using the website to purchase tickets, but rather than pay with a credit card, be billed at the end of each month. To use the billing option, a travel agent must contact a sales agent with Crescent City and complete a detailed application with at least two references. Once an application is complete, the sales manager verifies the information, contacts the references, and either approves or denies the application. If the application is approved, the sales manager decides on a credit limit for the travel agent. Terms of payment for all travel agent customers is 30 days from the invoice date.

The auditor performs tests of controls on the credit-granting process and gathers sufficient appropriate audit evidence to conclude that the process is working effectively. Credit is only granted after a thorough credit check. However, Crescent City has continual problems collecting from the larger travel agents within the 30-day period. Some of the largest travel agents regularly take 90 or more days to pay an invoice. Crescent City allows this late payment habit to continue simply because of the volume of business generated by the large travel agents. Crescent City has 398 travel agents as customers, with 42 of them representing 81% of accounts receivable.

Accounts receivable for the theme park consists of balances from travel agents only, not individual customers. The accounts receivable (A/R) manager estimates bad debt expense and the allowance for doubtful accounts each quarter, and then performs a final evaluation for the year-end financial statements. The A/R manager submits the estimates to the controller for approval.

Required

a. Compile a list of questions you would ask the A/R manager and controller during risk assessment to gain an understanding of the process for estimating bad debt expense and the allowance for doubtful accounts.

b. What specific substantive procedures would you perform at interim and/or year-end on the bad debt expense and allowance estimates?

c. Evaluate the level of estimation uncertainty that is associated with this estimate. What factors impact your assessment of estimation uncertainty?