Auditing: Confirmation of Accounts Receivable
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Auditing standards require the confirmation of accounts receivable in normal circumstances. What are the three exceptions to this requirement? Describe the differences between positive and negative confirmations. Which type is generally viewed as more reliable?
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Solution Summary
This solution provides with you with an in depth explanation as to what are the exceptions to the auditing requirement of confirming accounts receivables; it also provides information which relates the differences between positive and negative confirmations, and which is considered to be more reliable.
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Let me start by saying that confirmation of accounts receivable is a generally accepted auditing procedure which is performed by auditors during an audit and is considered to be a very important step in the audit process. It is a procedure that is normally done to garner information from external sources (i.e. debtors, in the case of accounts receivable) to prove that assertions made by management about the existence, completeness and valuation of debtors and their transactions are actually true. As the question states, under normal circumstances confirmation of accounts receivable is normally performed during an audit, however, there are three exceptions to this requirement and you may note the following excerpt:
"The presumption that the auditor will confirm accounts receivable may be overcome if one of the following exists:
1) Accounts receivable are not material to the financial statements.
2) The use of confirmations would be ineffective (for example, based on experience, the auditor concludes that response rates will be inadequate or that responses will be unreliable).
3) In some circumstances, the auditor's combined assessed level of inherent and control risk may be low, and that level, in conjunction with evidence expected to be provided by substantive tests, is sufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions." (Source: ...
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