Auditing Exam 3 (Topic 12)

U.S. standards also require auditors to use confirmations when auditing accounts receivable unless one of the following is true

-The overall account balance is immaterial -External confirmation procedures would be ineffective -The auditor's assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.

Security with confirmations: Best Practices

-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

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. -Blind confirmations ask the third party to fill in the amount

Negative confirmation

Asks 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. considered less reliable and only to be used when RMM is low, population is large # of small balances or transactions, low exception rate is expected.

Confirmations

Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party) The response can come to the auditor by way of a written response, an electronic communication, or other medium. Benefits: reliability of evidence is increased, evidence directly obtained by auditory is more reliable, evidence in documentary form is more reliable than orally

Maintaining control with confirmations

Establishing direct communication between the intended recipient and the auditor to minimize the possibility that the results will be biased because of interception and alteration of the confirmation requests or responses

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

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.

Management's refusal to allow the auditor to confirm accounts receivables is in all cases a scope limitation requiring withdrawal from the audit engagement. T/F?

False This is not always true. 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.

Many banks have begun requiring that paper-based confirmations be used in place of electronic confirmations. T/F?

False This statement is false. Many banks and other entities have begun refusing to respond to paper-based confirmations, demanding that the auditor use electronic confirmations.

If differences exist between the reported balance and the balance obtained by the auditor through audit confirmations, the auditor should NOT request an explanation from management, but should instead corroborate their explanation with other evidence. T/F?

False This statement is false. The auditor would normally request an explanation from management and would corroborate management's explanation with supporting evidence.

If the auditor does not receive a confirmation letter from a client customer after requesting a response, she can call the customer and obtain an oral confirmation in place of a written confirmation. T/F?

False Oral responses are not appropriate for obtaining confirmation of accounts receivable balances. A phone call may be appropriate to encourage a written response, but the auditor cannot rely on an oral confirmation only.

If differences exist between the reported balance and the balance obtained by the auditor through audit confirmations, the auditor should request an explanation from management and corroborate their explanation with other evidence. T/F?

True

Many large banks and audit firms have entirely adopted electronic confirmation services such as Confirmation.com because of the advantages of using these services relative to other approaches. T/F?

True

If the information obtained through audit confirmations differs from the information reported by management in the financial statements, the auditor should NOT immediately conclude that the financial statements are not fairly stated. T/F?

True Differences between the reported balance and the balance obtained through audit confirmations could indicate timing differences, disputes, or other reasons. The auditor should investigate any differences to determine the reason for the difference.

If the auditor does not receive a confirmation letter from a client customer after requesting a response, she can call the customer to follow up on the confirmation. T/F?

True Oral responses are not appropriate for obtaining confirmation of accounts receivable balances. However, a phone call may be appropriate to encourage a written response.

Many banks have begun requiring that electronic confirmations be used in place of traditional, paper-based confirmations. T/F?

True This statement is true. Many banks and other entities have begun refusing to respond to paper-based confirmations, demanding that the auditor use electronic confirmations.

The first step the auditor should take if the balance reported by management differs from the balance obtained through confirmations is to investigate the reason for the difference. T/F?

True This statement is true. The difference can be due to many factors so the auditor should investigate the reason for the difference.

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

True This statement is true. There are three conditions that would allow the auditors to determine not to use confirmations for accounts receivables balances.

Which of the following types of audit confirmations provides the auditor with the strongest form of audit evidence? a. Positive confirmations b. Negative confirmations c. Both provide equal levels of audit evidence

a. Positive confirmations Positive confirmations provide the auditor with the strongest form audit evidence since negative confirmations assume that an unreturned confirmation means that the confirming party agrees with the information on the confirmation request, which is not generally a good assumption.

Which of the following is NOT considered appropriate when auditors use external confirmations? a. Requesting that management mail the confirmations that the auditor has prepared b. Requesting that management provide a listing of all customers with receivables balances c. Both of the above ARE appropriate d. Neither of the above is appropriate

a. Requesting that management mail the confirmations that the auditor has prepared The auditor should maintain control over sending the requests to the client's customers. They should not allow management to mail the confirmation requests because of the risk that the requests could be tampered with.

Electronic confirmation services typically provide each of the following benefits except: a. Reduced time in receiving confirmation requests b. Reduced likelihood that confirmation requests will be intercepted and manipulated c. Verification of the authenticity of the third-party respondent d. Each of the above is a typical benefit of using electronic confirmation services

d. Each of the above is a typical benefit of using electronic confirmation services