Auditing Topic 12

process of confirmations pp version

1.Select items for confirmation & ID third party2.Design & prepare confirmation3.Mail/Communicate confirm request while maintaining control over request4.Obtain confirmation or follow up5.If can't obtain confirmation, perform alternative procedures6.If have exceptions, investigate and consider if alternative procedures needed7.Evaluate evidence and conclude on assertion

reasonable assurance

90-95%

Accounts Receivable Confirmation

Examine subsequent cash collections relating to customer balance Examine source documents relating to the sale(s) and creation of the accounts receivable balance (i.e., purchase orders, shipping documents, invoices, etc.)

Accounts Payable Confirmation

Examine subsequent cash disbursements and compare to receiving reports, invoices received, and other vendor communication to ensure completeness

When an auditor sends confirmation requests to a client's customers, he is primarily testing the completeness assertion.

False - he is testing existence

While audit confirmations provide evidence to the auditor, the evidence is not very high quality because it comes from outside of the entity.

False -Evidence is typically more reliable if it is obtained from a source that is independent from the client.

In seeking to maintain control over the confirmation process, the auditor should always prepare each confirmation request.

False- It is common practice for the client's employees to prepare confirmation requests. However, the auditor should select the customers whose balances will be confirmed and should verify that the information on the confirmation requests matches with the information in the client's records.

Which of the following types of audit confirmations provides the auditor with the strongest form of audit evidence?

False-Management may have legitimate reasons for not wanting the auditor to confirm receivables with their clients. The auditor should carefully review the reasoning for management's refusal to allow them to confirm receivables

Oral responses from confirming parties are NOT appropriate for which purpose?

For confirming that proper care was taken when completing the confirmation form

Electronic confirmation services typically provide each of the following benefits except:

Reduced time in receiving confirmation requests Reduced likelihood that confirmation requests will be intercepted and manipulated Verification of the authenticity of the third-party respondent Each of the above is a typical benefit of using electronic confirmation services (Correct)

Which of the following is NOT considered a best practice when sending confirmation requests? Including a self-addressed, stamped envelope with the confirmation request Requesting a fax instead of a mailed copy of the confirmation Mailing the confirmation request from a location other than the client's mail room Verifying the existence of the third party and the accuracy of the recorded contact information Each of these is considered a best practice when sending confirmation requests

Requesting a fax instead of a mailed copy of the confirmation

Which of the following is NOT considered appropriate when auditors use external confirmations?

Requesting that management mail the confirmations that the auditor has prepared

benefits of confirmations

The reliability of audit evidence is increased when it is obtained from sources that are independent of the entity being audited. Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control). Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed).

Electonic confirmation services like cofirmation.com assist the auditor in validating the identity of the respondent and also significantly reduces the opportunity for the client to interfere with the confirmation process.

True

Management's refusal to allow the auditor to confirm accounts receivables is not always a scope limitation requiring withdrawal from the audit engagement.

True

best practices to follow with confirmations

Verify the existence of the third party and the accuracy of recorded contact information Mail the confirmation request from a location other than the client's mail room Include a self-addressed, stamped envelope to increase the likelihood that confirmation requests are returned directly to the auditor Include a fax number and encouraging respondents to return the confirmation request by both mail and fax, thus minimizing the opportunity for alteration after the third party completes the confirmation request Use a third party electronic confirmation system

negative confirmation

ask the third party to verify the information provided and to return the confirmation letter only if a discrepancy is noted. When using negative confirmations, the auditor assumes that an unreturned confirmation letter indicates agreement between the balance shown on the client's books and the balance on the third party's books.

positive confirmation

asks the third party to verify the information provided and to return the confirmation form to the auditor, regardless of whether or not the stated balance is correct, noting any discrepancies

confirmations

audit evidence obtain as a direct written response to the auditor from a third party

if the balance reported by management differs from the confirmed amount, this should be documented as a

discrepancy

Which of the following types of audit confirmations provides the auditor with the strongest form of audit evidence?

positive confirmations

Confirmation.com

provides auditors with the option to electronically confirm the existence of their clients' accounts using a secure on-line system that validates the identity of participants and eliminates potential client interference in the third-party confirmation process.

Audit confirmations involve direct communication with third parties (i.e. outside of the entity) to obtain evidence about an assertion.

true

Confirmations are considered high quality evidence

true

U.S. auditing standards require the use of external confirmations for accounts receivables with few exceptions.

true

Cash Balance Confirmation

Examine bank statements

blind confirmation

asks the third party to fill in the amount owed without providing the account balance according to the client's books.