In his opinion saunders was unlikely to collect the

loans. In his opinion, Saunders was unlikely to collect the balance due. Saunders's immediate concern was the
impact the circumstances would have on his loan agreement with the bank.
Saunders uses the direct write-off method to recognize uncollectible accounts expense. Removing the $45,000
receivable from the collateral pool would leave only $55,000 of receivables, reducing the available credit to $38,500
($55,000 × 0.70). Even worse, recognizing the uncollectible accounts expense would so adversely affect his income
statement that the bank might further reduce the available credit by reducing the percentage of receivables allowed

CHAPTER05
under the loan agreement. Saunders will have to attest to the quality of the receivables at the date of the loan but
reasons that since the information he obtained about the possible bankruptcy was “off the record” he is under no
obligation to recognize the uncollectible accounts expense until the receivable is officially uncollectible.
Required
1. How are income and assets affected by the decision not to act on the bankruptcy information?
2. Review the AICPA's Articles of Professional Conduct (see Chapter 4) and comment on any of the
standards that would be violated by the actions Saunders is contemplating.
3. How do the elements of the fraud triangle (see Chapter 4) apply to this case?