Please assist into answering this question:

The reason for the allowance account is because some accounts receivables may not be collectable. This is not what makes the allowance account "high risk".

The purpose of the allowance account is to recognize that, historically, a certain amount of the company's accounts receivables have been uncollectible. (Which one would assume they are trying to address and issues with credit granting, which is something the auditors would also evaluate if the company consistently has high bad debt expense.) The company would make a documented methodology base on this history, (or industry information if it is a new company) and then use that methodology to calculate their allowance amount.

The reason that the company has to make and record this allowance is to provide a more accurate picture of their financial health for financial statement users. For instance, if they consistently have 5% of their AR accounts turn into bad debt their current accounts receivables would be potentially misstated by 5% which then misleads a financial statement user if it is not shown on the financials.

What makes it high risk is the fact that it is based on management's estimates. Auditors have found that entity's will use this account to help ensure financials always appear consistent. For example, in good years they will load the allowance account with extra dollars to reduce tax liabilities. Essentially hiding income in a reserve. Then, in a bad year management will reduce the allowance account and moves the excess into the bottom line. Thus, the financials in the bad year will appear close to the financials in the good year due to the manipulation of the allowance account.

What should the auditor request from management and then review carefully?