Question 1

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.

Accepted Answer

It is common to use positive confirmations for accounts with large balances due to their higher risk, and negative confirmations for accounts with small balances, as they are considered lower risk.

Question 2

Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.

Accepted Answer

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Question 3

The confirmations must be mailed by the auditor, but should contain the return address of the client.

Accepted Answer

Confirmations should be mailed by the auditor and contain the return address of the auditor to ensure independence and control over the confirmation process.

Question 4

Negative confirmations are less expensive, and less reliable, than positive confirmations.

Accepted Answer

Negative confirmations only require a response if the recipient disagrees with the information provided, which saves time and money. However, they are less reliable than positive confirmations because the recipient may overlook or ignore the request, resulting in an inaccurate conclusion. Positive confirmations require a response regardless of the accuracy of the information provided, which makes them more reliable but also more costly and time-consuming.

Question 5

The auditor should perform procedures to verify the addresses used for the accounts receivable confirmations.

Accepted Answer

The auditor should perform procedures to ensure that the addresses used for the accounts receivable confirmations are correct and up-to-date, in order to ensure that the confirmations are being sent to the proper recipients. This can include verifying addresses with the client or third-party sources, such as postal services or commercial databases.

Question 6

U.S. auditing standards indicate that auditors should use external confirmations for accounts receivable. However, there are certain circumstances where confirmation may not be appropriate. List these three situations.

Accepted Answer

The answer of U.S. auditing standards indicate that auditors should...

Question 7

Blank confirmations are considered less reliable than standard positive confirmations.

Accepted Answer

The answer of Blank confirmations are considered less reliable than...

Question 8

A confirmation is a type of audit evidence.

Accepted Answer

A confirmation is a form of audit evidence that is obtained through direct communication with a third party. It provides support for the information that is included in the financial statements, and it is considered to be a reliable and objective source of evidence. Therefore, the statement is true.

Question 9

When a customer disagrees with the amount shown on an account receivable confirmation, the auditor should not ask the client to reconcile the difference.

Accepted Answer

The auditor should ask the client to reconcile the difference and investigate the reason for the discrepancy. It is important to resolve any issues concerning the accuracy and completeness of the client's accounts receivable balance.

Question 10

Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.

Accepted Answer

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Question 11

If auditors consider confirmations of accounts receivable to be ineffective evidence because response rates will be inadequate or unreliable, they need not confirm accounts receivable.

Accepted Answer

Auditors have the discretion to decide which audit procedures to use based on their professional judgment and assessment of the risks of material misstatement. If they believe that confirmations of accounts receivable would not be effective in providing sufficient and appropriate audit evidence, they can use alternative procedures, such as substantive analytical procedures, examination of supporting documentation, and observation of physical inventory counts. However, they should document the reasons for not using confirmations and consider the impact on their overall audit opinion.

Question 12

Auditors must maintain control of confirmations until they are returned from the customer.

Accepted Answer

Auditors need to maintain control of confirmations as they are important pieces of evidence. They should not be released or given to the customer until they are returned and reviewed by the auditor. This helps ensure the accuracy and completeness of the information obtained from the customer.

Question 13

When sending confirmations during most audits of accounts receivable, the emphasis is often on confirming larger and older accounts.

Accepted Answer

This is true. Larger and older accounts are considered more significant and may have a greater impact on the overall financial statements, so auditors typically prioritize them for confirmation.

Question 14

Stratification of accounts receivable is desirable when using confirmations.

Accepted Answer

Stratification of accounts receivable allows for more efficient and effective use of confirmations, as it allows the auditor to focus on high-risk accounts and obtain a more representative sample for testing.

Question 15

Describe the differences between positive and negative confirmations. Which type is generally viewed as more reliable?

Accepted Answer

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Question 16

Both U.S. and international auditing standards require the use of confirmations for accounts receivable.

Accepted Answer

While U.S. auditing standards (GAAS) require the use of confirmations for accounts receivable, international standards (ISA) do not mandate it but consider it a useful audit procedure.

Question 17

When making the sampling decisions for accounts receivable confirmations,
A) it is important to sample some items for every material segment of the population.
B) if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement.
C) inherent risk does not impact the sample size.
D) stratification of the sample is discouraged under current auditing standards.

Accepted Answer

Sampling should ensure that every material segment of the population is represented. This helps to ensure that the sample is representative of the population as a whole.

Question 18

Briefly describe the circumstances in which it is acceptable to use negative confirmation requests.

Accepted Answer

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Question 19

Negative confirmations normally require a larger sample size than positive confirmations.

Accepted Answer

This is because negative confirmations are trying to prove the absence of something, which requires a larger sample size to be confident in the results. Positive confirmations, on the other hand, are trying to prove the presence of something and can often be achieved with smaller sample sizes.

Question 20

Each client misstatement in accounts receivable must be analyzed to determine whether it was consistent with the original assessed level of control risk.

Accepted Answer

Each misstatement in accounts receivable should be analyzed to identify whether it is consistent with the previously identified control risk. By doing so, an auditor can evaluate the effectiveness of controls over accounts receivable and determine the need for further audit procedures.

Quiz 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable