Question

You have decided to use positive confirmations as a substantive audit test of accounts receivable. Assume you have selected balances to confirm from your client’s accounts receivable subsidiary ledger at year-end and you have sent letters directly to customers based on these selections. Answer and clearly explain each of the following: A.) What is a positive confirmation? B.) Is this a vouching or tracing test? C.) What will you do if no response is received from a customer? Be specific.

Answer 1

A. External confirmations is one of the substantive audit procedure to get sufficent and appropriate audit evidence regarding the balnaces of account receivable

There are 2 types of external confirmations they are :-

1. Positive confirmation

2. Negative confirmation

Positive confirmation :- a request that the confirming party responds directly to the auditor indicating whether the confirming party agrees or disagrees withthe information in the request,or providing the required information.

B.

Tracing :- it refers to first selecting n accounting transaction and then foloowing it into a ledger or journal. The direction of testing in this case from source document to journal or ledger and test whether transaction that occurred are recorded in the accounting records.

Vouching :- it refers to first selecting of an item from accounting records like journal or ledger and then examining the underlying source document. Thus, the direction of from journals or ledgers back to the source document.vouchung provides that evidence that items included in the accounting journal or ledgers have occured.

In the given auditing procedure of positive confirmation, the direction of verification is from accounting journals or ledgers to the source document. first we select the balances of the account receivable and then we send the positive confirmation for the response of the account receivable.

Hence, it is vouching.

C. If there is no response for positive confirmation :-

Then based on the materiality of the amount involved with thta particular account receivable we them follow up with aa second and sometimes a third request to those who donot respond. Where the auditor is unable to obtain response, the auditor should use the alternative procedure.

these are all information and explanations required to solve the above given questions.

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