Question

Confirmation of accounts receivable is presumptively mandatory audit procedure. In performing this procedure, auditors use positive confirmation requests or negative confirmation requests or a combination of both. Which confirmation provides auditors with more accurate assurance, and why? (2 marks) B. Describe two conditions which should exist for the auditors to use the negative form of request. (4 marks) C. If a response is not received to an initial positive confirmation request, describe two actions that should be taken by the auditors, including a discussion of alternative auditing procedures. (4 marks) A.

Answer 1

A. A positive confirmation is a more accurate and reliable evidence and assurance for the auditor because the auditor in this option can perform follow-up procedures if a response is not received from the debtor whereas in the case of a negative confirmation, failure to respond must be taken and presumed as a correct response, even though the debtor may have ignored the confirmation request A positive confirmation is considered to represent a higher quality of evidence than a negative confirmation, since the auditor receives explicit evidence from the third party

B. The Conditions that should exist for auditors to use the negative form of request are as follows:

1. The assessed level of risk of material misstatements is low and there is sufficient appropriate audit evidence that has been procured or obtained on the functioning or operating effectiveness of the controls.
2. There is a presence of a large number of small balances.
3. A very low exception rate is expected
4. The auditors have absolutely no idea or have no clue of the circumstances that could cause the person receiving the negative form of request to disregard the auditor.

C. If a response is not received to an initial positive confirmation request , then the actions to be taken by the auditor (including discussion of alternative auditing procedures are as follows):

1. Send a second request

2. Consider sending a third request or telephoning the customer

3. For the nonrespondents who are significant there is a need to perform alternative auditing procedures which are as follows:

a. Examining subsequent cash receipts

b. Vouching the transactions making up the accounts balance to invoices and finally shipping the documents

c. Establishing the validity of the customer