Case Study B Data Analytics and a Skeptical Mindset

I was a senior working on a client for whom a significant revenue contract had favorable pricing terms for the company. However, this contract was approaching its end, and the pricing was expected to become less favorable. During our audit, we decided to use data analytics to assist us in performing preliminary analytical procedures. We started with a simple analytic to analyze days in accounts receivables (A/R) over a multiyear period to determine whether there were unexpected relationships between A/R and the allowance for doubtful accounts (the allowance) that would affect our identification and assessment of risks of material misstatement in the allowance. We then used a histogram to visualize the days in receivable over the same multiyear period. These were pretty standard tests. However, our analysis indicated that while the number of days in A/R remained consistent, the allowance had significantly increased during the current year. This was inconsistent with what we expected to find, so I scheduled a meeting with the staff accountant to discuss the results. The staff accountant was unable to answer my questions, and I left the meeting without obtaining evidence to support the amount booked to the allowance. My next move was to speak with the accounting manager, but he was also unable to provide any additional information to explain the results of the analytic, only clarifying that he had recorded a journal entry to increase the allowance as instructed by senior management.

Questions:

1. Identify the key red flags that heighten your professional skepticism, and explain why you believe them to be red flags?
2. Evaluate/Describe what you would do next.