Question

Evaluate and discuss the following statement: "In many audits in which accounts receivable is material, the requirements of confirming customer balances is a waste of time and would not be performed by competent auditors if it were not required by auditing standards. When internal controls are excellent and there are a large number of small receivables from customers who do not recognize the functions of confirmation, it is a meaningless procedure. Examples include well-run utilities and retail stores. In these situations, tests of controls and substantial tests of transactions are far more effective than confirmations."

Answer 1

SOLUTION:-

The above statement reflects the auditor's choice where he might face a situation in which confirmation or internal control test or both should be used or not. Ascertaining the amount shown by accounts receivables can be verified by performing the evaluation of internal controls and checking the transactions. The entire tests are somewhat dependent on the opening balance shown in the account which should be subject to testing the internal controls so that the ending balance is accurate and fair. The best way to go in such circumstances to go ahead and confirm the balances from the customers thems elves. This is necessary because the internal control is self-made and there might be some collusion possibilities due to which there might exist some disputed accounts or fraudulent accounts. Confirming these balances is a more secure way in these cases where the controls and tests might not give desired results due to their related to the organization itself. The direct and free source of confirmation is accurate over here

Now even going ahead with confirmation should be done very carefully. There are hidden dangers in this method also for the auditor Those responsible with maintain the account might provide a wrong list or accounts receivables by removing certain accounts due to which the confirmation wll fail because the sample population will be incomplete. Again, the customers might give confirmation which may not be true. The best method therefore over here is to scan the transaction from its origin to its end matching it up with the master account. Thus, it shows that confirmation of accounts receivables checking and testing the internal control and testing the transactions. These tests and confirmations work hand in hand with one another if confirmation is found accurate, the controls and other tests can be performed more easily and if latter is quite effective confirmation can be done be reduced. Hence the auditor should perform both of them subject to the nature and situation on hand while performing audit of accounts receivable under the given circumstances but he should employ confirmation and internal control tests simultaneously and should not bypass any one of them.

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