Which of the following is not a valid reason for an auditor deciding not to send A/R confirmations
What is an Accounts Receivable Confirmation?When an auditor is examining the accounting records of a client company, a primary technique for verifying the existence of accounts receivable is to confirm them with the company's customers. The auditor does so with an accounts receivable confirmation. This is a letter signed by a company officer (but mailed by the auditor) to customers selected by the auditors from the company's accounts receivable aging report. The letter requests that customers contact the auditors directly with the total amount of accounts receivable from the company that was on their books as of the date specified in the confirmation letter. The auditor typically selects customers for confirmation that have large outstanding receivable balances, with secondary consideration given to overdue receivables, followed by a random selection of customers having smaller receivable balances. Show
Since the information obtained through confirmations comes from a third party, it is considered to be of higher quality than any information that an auditor could have obtained from the client company's internal records. The Difference Between Positive and Negative ConfirmationsThere are two forms of confirmation, which are noted below. Positive ConfirmationThis is a request to provide a response to the auditor, whether or not the customer agrees with the receivable information listed in the confirmation. Negative ConfirmationThis is a request to contact the auditor only if the customer has an issue with the accounts receivable information contained within the confirmation. This is a less robust form of evidence, since there is an inclination by customers to not contact the auditor, which leads to the presumption by the auditor that customers agree with the presented accounts receivable information. Alternative Audit ProceduresIf customers do not return confirmations to the auditor, the auditor may go to considerable lengths to obtain the confirmations, given the high quality of this form of evidence. If there is no way to obtain a confirmation, then the auditor's next step is to investigate subsequent cash receipts, to see if customers have paid for those invoices that were not confirmed. This is a strong secondary form of evidence that the accounts receivable outstanding at the end of the reporting period being audited were in existence at that time. Dealing with Confirmation VariancesIf the information received from a customer varies from the receivable amount listed in the company's receivable report, the auditor usually asks the company to reconcile the difference, which the auditor can then take further action on, as necessary.
Confirmation of accounts receivable has been a nearly sacrosanct auditing procedure for over 50 years. Before most of todays practicing CPAs were even born, the AICPA issued Statement on Auditing Procedure no. 1, Extensions of Auditing Procedure , requiring auditors to confirm accounts receivable whenever they were material to the financial statements. SAS no. 67, The Confirmation Process , followed in 1991 with significant changes in procedure. Despite those pronouncements and the publication in 1995 of the AICPA Auditing Procedure Study Confirmation of Accounts Receivable , problems continued to crop up. In fact, the Institutes peer review division (now the practice monitoring division) released a 1995 report in the Practicing CPA citing fundamental violations of the provisions of SAS no. 67. Even though the principle of confirmation is long-standing, perhaps these peer review deficiencies reflect auditors inadequate understanding of the requirements. Audit quality will be enhanced if practitioners have a sound understanding of the provisions of SAS no. 67. The flowchart on pages 4041 portrays the major aspects of the confirmation process. Additionally, this article emphasizes those commonly identified peer review confirmation deficiencies. KNOW WHAT IS
NECESSARY View Flow Chart Defining Confirmation Of Accounts Receivable
Practice observations, as noted in the 1995 report, led to this change from SAP no. 1. One of these observations was the concern with recipient say yes behavior in which the confirmation is signed and returned without actual verification. Say yes behavior may be suggested from the results of other related substantive testing and observations when the recipient does not adequately investigate the accuracy of balances being confirmed. The AICPA also observed that recipients might lack the financial sophistication to provide reliable responses or might simply ignore the requests. For example, auditors often dont confirm hospital receivables, because response rates are usually inadequate. Similarly, the federal government and some companies have a policy of not responding to confirmation requests. Because the current standard makes clear the presumption that auditors need to confirm accounts receivable, practitioners must document carefully when they have not sent confirmations. Auditors should consider other auditing procedures when they do not confirm accounts receivable, especially when the balances are material. SAS no. 67 offers no specific guidance, but auditors can apply the following two substantive tests:
In a manufacturing or distribution company, for example, the documentation includes examination of customer purchase orders (POs), client invoice copies, shipping documents and third-party evidence of delivery. Audit problems that might be found in such documentation include, for example, evidence in customer POs of consignment arrangements rather than sales, as well as shipping documents indicating improper sales cutoffs. Additionally, auditors using the examination of subsequent cash collections as a primary substantive procedure might consider performing procedures to provide evidence that the source of the payment was the customer. The ZZZZ Best fraud clearly taught this lesson. CHOOSE THE RIGHT REQUESTS Auditors have to decide whether they can use negative accounts receivable requests. Peer reviewers often discover that auditors inappropriately select negative confirmation requests. Auditors must use positive confirmations unless all of the following conditions are met:
The first condition makes it clear that positive requests are the norm. For example, auditors usually assess control risk at high levels when auditing small clients because of their inadequate controls. Similarly, auditors routinely assess inherent risk at moderate or even higher levels for the revenue cycles of most audit clients because of concerns with proper cutoffs and adequacy of relevant accounting estimates. Auditors cannot assess combined inherent and control risks as low if either component is high. Whether the auditor uses positive or negative requests, SAS no. 67 sanctions confirming individual transactions rather than entire account balances. Thus, auditors may use sampling to select accounts for confirmation or for individual unpaid transactions from the entire population of unpaid transactions. Some vendors process payables through voucher systems, which, in their simplest form, involve no accounts payable sub accounts. While vendors with voucher systems may say they are unable to confirm an entire balance, other vendors will acknowledge willingness to confirm a few transactions. Whether using positive or negative confirmations, auditors must carefully control the mailing of the requests and should investigate any timing differences or exceptions indicated by respondents. In engagements meeting all conditions for negative confirmations, the auditors must recognize that unreturned requests rarely provide evidence concerning assertions other than aspects of the existence assertion. In addition, unreturned requests do not provide explicit evidence of actual successful delivery or even that any of the information was actually verified. Therefore, it is often considered prudent for the auditors to send more negative requests than might be the case had positive requests been used. PROJECT IDENTIFIED MISSTATEMENT SAS no. 39, Audit Sampling , requires auditors to project known misstatement results identified in a sample as likely misstatements in the underlying population. The auditors then must compare those likely misstatement amounts with the tolerable misstatement amounts derived during audit planning to determine whether sampling risk is acceptably low for the account balance. However, peer reviewers have found that auditors sometimes fail to make this required projection and concomitant evaluation. KNOW WHAT IS RECEIVEDAND WHAT ISNT The auditors may want to use blank-form positive confirmations, which ask that respondents fill in balance or other data, to minimize the possibility of say yes behavior. However, blank forms may lead to lower response rates, as well as a greater likelihood that incorrect balances will be reported. Auditors should send second requests to nonrespondents because nonresponses do not provide evidence about financial statement assertions. Third requests, however, often are not very fruitful. Auditors facing nonresponses to subsequent positive confirmation requests generally have to use alternative procedures, as noted below. APPLY NECESSARY ALTERNATIVE PROCEDURES Some of the confusion may stem from SAS no. 67s introduction of a new concept: the acceptability of omitting alternative procedures in limited instances . If both of the following two conditions are met, auditors may omit alternative procedures:
Auditors must combine and project to the population being examined any misstatements either revealed in the investigation of responding positive requests or identified in the process of applying alternative procedures to nonresponses. Peer review teams sometimes find that practitioners do not properly compare extrapolated misstatement with tolerable misstatement. In general, auditors should send positive requests to confirm large accounts receivable balances, as no sampling risk is acceptable for individual receivable balances exceeding tolerable misstatement for a given engagement. Because such positive requests constitute a subpopulation that has been audited in its entirety rather than sampled, any misstatement amount revealed would be equivalent to likely misstatement. Auditors then would combine any actual misstatement amount from large accounts receivable with projected misstatement amounts identified from confirmations selected through sampling procedures. A KEY PROCESS
Which of the following are factors to consider when designing accounts receivable a/r confirmation requests?Factors such as the form of the confirmation request, prior experience on the audit or similar engagements, the nature of the information being confirmed, and the intended respondent should affect the design of the requests because these factors have a direct effect on the reliability of the evidence obtained through ...
When an auditor does not receive replies to positive requests for year end accounts receivable confirmations the auditor most likely would?. 31 When the auditor has not received replies to positive confirmation requests, he or she should apply alternative procedures to the nonresponses to obtain the evidence necessary to reduce audit risk to an acceptably low level.
Why do confirmations not typically provide reliable evidence about the completeness assertion?The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because: customers may not be inclined to report understatement errors in their accounts.
Are bank confirmations required for an audit?In fact, the use of bank confirmations has never been a required procedure under any auditing standard.
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