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What is the purpose of a positive confirmation in auditing?
What is the purpose of a positive confirmation in auditing?
- To assess the risk of material misstatement
- To gather evidence without client interaction
- To confirm transactions with internal records only
- To request a response on the accuracy of amounts owed (correct)
Under what circumstances is negative confirmation typically used?
Under what circumstances is negative confirmation typically used?
- When auditors need detailed account information
- When there are high risks of material misstatement
- When there is no indication that customers will ignore requests (correct)
- When account balances are large and few
Why is positive confirmation considered more reliable than negative confirmation?
Why is positive confirmation considered more reliable than negative confirmation?
- It does not require direct customer interaction.
- It is cheaper to implement.
- It requires a response even if the information is correct. (correct)
- It is sent only to large customers.
What situation would lead an auditor to use positive confirmation?
What situation would lead an auditor to use positive confirmation?
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What characteristic of account balances typically prompts the use of negative confirmation?
What characteristic of account balances typically prompts the use of negative confirmation?
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Study Notes
Positive Confirmation
- Auditors send this confirmation to a client's customer, requesting a response directly whether the stated amount owed is correct or incorrect.
- The auditor requests that the customer provide specific information like their account balance with the entity.
- This confirmation is used when the information the auditor needs is only available outside the company.
- It’s used when an entity’s information systems and internal controls are unreliable or ineffective.
- It’s used when fraud risk factors, such as management overriding internal controls, prevent the auditor from relying on evidence from the entity.
- It’s used when account balances comprise a small number of large accounts.
- Positive confirmation is considered more reliable but more costly than negative confirmation.
Negative Confirmation
- Auditors send this conformation to a client’s customer, but only request a response if the customer disagrees with the amount stated on the confirmation.
- This type of confirmation is used when there is no reason to believe recipients of negative confirmation requests will disregard them.
- It’s used when receivables comprise a large number of small, homogenous, account balances, transactions or conditions.
- It’s used when the auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion.
- It’s used when very few or no exceptions are expected.
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