Question

Ch.16 Discussion Topic: Audit procedure: Accounts Receivable Confirmation What procedures should an auditor perform for a Positive confirmation (vs. negative A/R confirmation) that is not returned by the client's customer? Please also discuss effectiveness (pros and cons) of each audit procedures you have decided to apply in conjunction with Accounts Receivables/revenue audit procedures/methodologies/techniques.

Answer 1

A negative confirmation is a document issued by an auditor to the customers of a client company. The letter asks the customers to respond to the auditor only if they find a discrepancy between their records and the information about the client company's financial records that are supplied by the auditor. For example, a confirmation letter tells a customer that the client company's records at year-end show an ending accounts receivable balance for that customer of $500,000. If the customer agrees with this number, it does not have to contact the auditor to confirm the supplied information. The auditor will then assume that the customer agrees with the information presented to it in the confirmation.

A negative confirmation is designed for use in situations where a client company's internal controls are already considered to be quite strong, so that the confirmation process is used as a secondary audit method for the accounts under review.

A positive confirmation is one in which the customer is required to send back a document, either confirming or disputing the account information sent to it by the auditor.

A negative confirmation does not require as much follow-up work by auditors as a positive confirmation, but is also not considered to be as high-quality a source of audit evidence as the positive confirmation, since some customers may not be bothering to send back a confirmation document, even though they have detected a discrepancy. For this reason, most auditors prefer to use positive confirmations over negative confirmations, despite the additional cost.

A negative or positive confirmation is not restricted for use with a client company's customers. They are also commonly used with suppliers to confirm small-dollar account balances. A negative confirmation is rarely used with a lender, since auditors want to be very sure about the ending debt balances reported by their clients. In this case, positive confirmations are nearly always used

What Is Positive Confirmation?

Positive confirmation is an auditing inquiry that requires the customer to respond, confirming the accuracy of an item. Positive confirmation requires proof of accuracy by affirming that the original information was correct or by providing the correct information if incorrect.

• Positive confirmation is an auditing inquiry that requires the customer to respond, confirming the accuracy of an item.
• Positive confirmation requires proof of accuracy by affirming that the original information was correct or by providing the correct information if incorrect.
• Positive confirmations are used to verify the amounts of liabilities, investments, bank accounts, accounts receivables, and payables.

Positive vs. Negative Confirmation

While positive confirmation requires supporting information despite the accuracy of the original records, negative confirmation requires a response only if there is a discrepancy. During a negative confirmation request, a business may be asked to confirm that an account balance is listed at a specific amount, such as $100,000. If the current account balance is $100,000, no additional action is required. If the balance differs, additional information must be provided to explain the difference. Negative confirmation letters are also used to ascertain if the recipient wants to opt-out of an event outlined in the letter.

Negative confirmation is more commonly used if the individual's or business's records are generally considered to be highly accurate. Typically, the company receiving a negative confirmation is believed to have stringent internal requirements and business practices. As a result, negative confirmation is much less costly and time-intensive for auditors since they usually only need to send one letter out.

Conversely, positive confirmation requests are more involved since financial records must be furnished even if the original information in the letter was correct. Also, positive confirmation requests are more likely to be used if the company's books are suspected of having errors. However, a positive confirmation letter is more common in complex transactions since it's more accurate and ensures that everyone is on the same page—or has the same financial information. In lending, for example, auditors use positive confirmations to banks and companies to ascertain the exact amount of a debt.

As a result, a positive confirmation tends to be a better representation of the financial information than a negative confirmation since it's an explicit request that has been returned by the recipient. If any dispute arises, a positive confirmation is physical evidence that the information was confirmed.