Question

Advanced Auditing Chapter 6: Professional Simulation – You will find this assignment at the end of Chapter 6

Assume that you have just been promoted to the position of in-charge accountant on the audit of Lancer Corporation, which manufactures and wholesalers consumer products. Lancer’s customer base is represented by about 10% of the customers that represent 65% of sales and a very large number of smaller retailers that make up the other 35% of the company’s sales. Last year Baker and Co. (Lancer’s auditors) send positive confirmations to a sample of Lancer’s customers. All of Lancer’s larger customers responded to the positive confirmations, but many of the smaller customers did not.

As in-charge on the Lancer audit, you have discussed the low response rate from the smaller customers with the audit manager, Dustin Barker. You have suggested sending negative confirmations to the smaller customers. The Dustin wants you to research the guidance provided by the U.S. Auditing Standards about using negative confirmation. Specifically, cut and paste the standard section that explains the significance of the evidence provided by unreturned negative confirmations.

Dustin would also like you to research the U.S. auditing standards about the factors that influence the reliability of confirmation. Draft a memo (no title page) that summarizes the factors that influence the reliability of confirmations as evidence about the existence and occurrence of receivables and sales.

To: Dustin Barker, Manager

Re: Factors that influence the reliability of confirmations From: CPA Candidate

Answer 1

Section 505 That Explains The Significance Of The Evidence Provided By Unreturned Negative Confirmations.

• The failure of a confirming party to respond to a negative confirmation request provides significantly less persuasive audit evidence than does a response to a positive confirmation request.
• Confirming parties also may be more likely to respond indicating their disagreement with a confirmation request when the information in the request is not in their favor but less likely to respond otherwise.
• For example, holders of bank deposit accounts may be more likely to respond if they believe that the balance in their account is understated in the confirmation request but less likely to respond when they believe the balance is overstated.
• Therefore, sending negative confirmation requests to holders of bank deposit accounts may be a useful procedure in considering whether such balances may be understated but is unlikely to be effective if the auditor is seeking evidence regarding overstatement.

Factors that influence the reliability of confirmations

• Whether the confirmation was received by the auditor directly or indirectly, confirmation recieved directly by the auditor is reliable.
• Whether confirmation came from the originally intended confirming party or not, confirmation which came from the originally intended confirming party is reliable.