Question

An audit associate is preparing an audit program for the audit of a client’s allowance for doubtful accounts. To gather evidence in support of the valuation assertion, the associate included the following audit procedure in the audit program:

Confirm accounts receivable by sending positive confirmations to a sample of customer account balances.

Required

1. a. Evaluate the relevance of the procedure in addressing the valuation assertion.
2. b. Comment on the reliability of the evidence gathered using the procedure.

Answer 1

Positive confirmation refers to an audit inquiry procedure that requires that the account receivables or the customers of the entity should respond to the inquiries made by the auditors by sending a positive confirmation for the accuracy of the amount of the balance. It assures that the customer is agreeing that the balance mentioned is accurate and if it is incorrect than the customer needs to provide the correct information.

a. The relevance of the positive confirmations procedure in addressing the valuation assertion can be noted down in the following manner-

Accounts receivables, as are short-term assets in nature so there exist high chances that these can be used by the entities as a collateral security in order to obtain short term loans from financial instruments . This makes it even more crucial that the doubtful receivables are audited properly to ensure that they in fact exist.

Auditors find using the positive confirmation procedure very accurate for asserting the value of balances with the customers. The amount of receivables needs to be verified by the third party in order to be fully ensured about the accuracy. A letter is sent to the customer mentioning the balance amount due with them. The party simply needs to send a positive note confirming that the amount mentioned is accurate.

This procedure is very helpful and relevant since the information is verified from the source itself. Connecting to the parties directly ensures the auditors that the listed accounts actually do exist and that the company is not trying to mislead or hide any information. The balances shown in the books as receivable are although doubtful but are not mentioned as doubtful with an intention to conceal information or hide facts. The recorded information is correct, accurate and true.

b. The reliability of evidence gathered with the help of confirmations is affected by the means of the third party confirmation obtained, past experience of the business entity with the account receivable party, the type of information being asked for to confirm and the efforts involved by the third party in confirmation

The audit evidence gathered from the positive confirmations is very reliable as the type of information asked is absolute quantitative, they have no direct relationship in the company's day to day affairs and so have no direct interest in the entity.Also, there is no need of putting any extra effort by the third party; they just need to send a simple response. Since they need not to put much efforts there are higher chances that they will not delay or feel burdened to reply back.