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In: Accounting

1. AICPA auditing standards address the confirmation of accounts receivable for private company audits. What are...

1. AICPA auditing standards address the confirmation of accounts receivable for private company audits. What are the circumstances under which confirmation of accounts receivable is not required? 2. When confirming accounting receivable, the auditor may use positive confirmations, negative confirmations, or a combination of both. Although the use of negative confirmations is less expensive than positive confirmation, negative confirmations are less reliable. Therefore, negative confirmations should be used only in certain circumstances. Discuss those circumstances. 3. Auditing standards indicate that the auditor should ordinarily presume that there is a risk of material misstatement due to fraud relating to revenue recognition. How might this concern related to revenue recognition affect the nature and extent of confirmation procedures? 4. Responses are often not received for positive accounts receivable confirmation requests. What should the auditor do if a confirmation response is not received? 5. Many differences identified on positive confirmation are timing differences, rather than misstatements. Explain the nature of a timing difference and give examples of common timing differences.

Solutions

Expert Solution

  1. Circumstances under which confirmation of accounts receivable is not required as per AU330:-
  • The overall account balance is immaterial.
  • External confirmation procedures for accounts receivable would be ineffective.
  • The auditor’s assessed level of risk of material misstatement is low.

  1. Incase of negative confirmation, the recipient is requested to reply only when the recipient disagrees with stated amount.

For using Negative Confirmation, all of the following circumstances are present:

  • The auditor has assessed the risk of material misstatement as low and has obtained sufficient evidence regarding the design and operating effectiveness of controls.
  • The population of items is made up of a large number of small, homogenous account balances, transactions, or other items.
  • The auditor expects a low exception rate.
  • The auditor reasonably believes that recipients will give the requests adequate consideration. Adequate consideration exist when there are high response rates on audits in previous year or of similar clients.
  1. Confirmation is undertaken to obtain evidence from third parties about financial statement assertions made by management. Section 326, Audit Evidence, states that, in general, it is presumed that "Audit evidence is more reliable when it is obtained from knowledgeable independent sources outside the entity.” Unusual or complex transactions may be associated with high levels of inherent risk and control risk. If the entity has entered into an unusual or complex transaction and the combined assessed level of inherent and control risk is high, the auditor should consider confirming the terms of the transaction with the other parties in addition to examining documentation held by the entity. The auditor should assess whether the evidence provided by confirmations reduces audit risk for the related assertions to an acceptably low level. In making that assessment, the auditor should consider the materiality of the account balance and his or her inherent and control risk assessments. When the auditor concludes that evidence provided by confirmations alone is not sufficient, additional procedures should be performed.
  1. If 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

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