It is February 16, 2018, and you are auditing Davenport Corporation’s financial statements for 2017

It is February 16, 2018, and you are auditing Davenport
Corporation’s financial statements for 2017 (which will be issued
in March 2018). You read in the newspaper that Travis Corporation,
a major customer of Davenport, is in financial difficulty. Included
in Davenport’s accounts receivable is $50,000 (a material amount)
owed to it by Travis. You approach Jim Davenport, president, with
this information and suggest that a reduction of accounts
receivable and recognition of a loss on doubtful accounts for 2017
might be appropriate. Jim replies, “Why should we make an
adjustment? Ted Travis, the president of Travis Company, is a
friend of mine; he will find a way to pay us, one way or another.
Furthermore, this occurred in 2018, so let’s wait and see what
happens; we can always make an adjustment later this year.”

Required: Write a memo:-

In your position as the external auditor of Davenport
Corporation, prepare a memo to Jim Davenport and address the
following:

  1. The ethical issues you both face.
  2. The major stakeholders involved and state how the stakeholders
    would be affected by the course of action suggested by Jim
    Davenport.
  3. Explain why you believe the course of action proposed by
    Charlie Brown is ethical or unethical.
  4. Explain the proper accounting treatment and support your answer
    with appropriate authoritative citation.
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