Lane Manufacturing Company is a relatively small local business that specializes in the repair and renovation of antique furniture. The owner is an expert craftsperson. Although a number of skilled workers are employed, there is always a large backlog of work to be done. A long-time employee who serves as clerk-bookkeeper handles cash receipts, keeps the records, and writes checks for disbursements.

The owner signs the checks. The clerk-bookkeeper pays small amounts in cash, subject to a month-end review by the owner. Approximately 80 regular customers are extended credit that typically amounts to less than SI .000. Although credit losses are small, in recent years the bookkeeper had established an allowance for doubtful accounts, and all write-offs were made at year-end. During January 2007 (the current year), the owner decided to start as soon as possible the construction of a building for the business that would provide many advantages over the presently rented space and would have space to expand facilities. As a part of the considerations in financing, the financing institution asked for 2006 audited financial statements. The company statements never had been audited. Early in the audit, the independent CPA found numerous errors and one combination of amounts, in particular, that caused concern.

There was some evidence that a $2,500 job completed by Lane had been recorded as a receivable

(from a new customer) on July 15. 2006. The receivable was credited for a $2,500 cash collection a few days later. The new account never was active again. The auditor also observed that shortly thereafter, three write-offs of accounts receivable balances had been made to Allowance for Doubtful Accounts as follows: Jones, $800; Blake. $750; and Sellers. $950—all of whom were known as regular customers. These write-offs drew the attention of the auditor.

Required: 1. Explain what caused the CPA to be concerned. Should the CPA report the suspicions to the owner? 2. What recommendations would you make with respect to internal control procedures for this company?