Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

49 Cards in this Set

  • Front
  • Back
What is the primary purpose of accounts receivable confirmation
satisfy existence, accuracy, and cutoff objectives
What is a confirmation?
A confirmation is a direct written response from a third party in a paper or electronic form and are considered highly reliable evidence because they are received directly from third parties.
What do US auditing standards indicate?
US auditing standards indicate that auditors should use external confirmations for material accounts receivable.
Confirmations may not be appropriate in the following 2 situations:
1. THe auditor considers confirmations ineffective evidence because response rates will likely be inadequate or unreliable.
2. The combined level of inherent risk and control risk is low and other substantive evidence can be accumulated to provide sufficient evidence.
Positive confirmation
A communication addressed to the debtor requesting the recipient to confirm directly whether the balance as stated on the confirmation request is correct or incorrect.
Blank confirmation
A type of positive confirmation that does not state the amount on the confirmation but requests the recipient to fill in the balance or furnish other information but requests the recipient to fill in the balance or furnish other information.
Why are blank confirmation more reliable than confirmations?
Blank forms require the recipient to determine the information requested so they are considered more reliable. Blank forms are rarely used in practice because they result in lower response rates.
Invoice confirmations
Another type of positive confirmation in which an individual invoice is confirmed, rather than the customer's account receivable balance. Many customers use voucher systems that allow them to confirm individual invoices but not blaance information so may improve conficmation response rates.
What are some pros of using invoice confirmations?
They may improve confirmation response rates and result in fewer timing differences.
What are the disadvantages of using invoice confirmations?
Disadvantage is not directly confirming ending balances.
Negative confirmation
Also addressed to the debtor but requrests a response only when the debtor disagrees with the stated amount.
WHy is a positive confirmation more reliable?
Because the auditor can perform follow up procedures if a response is not received from the debtor. With a negative confirmation, failure to reply must be treated as a correct response, even though the debtor may have ignored the confirmation request.
What is the benefit that offsets the reliability disadvantage?
Negative confirmations cost less
Conditions when it is acceptable to use negative confirmations?
1. When risk of material misstatement is low and there is sufficient appropriate evidence regarding design and operating effectiveness of controls relevant to assertion being tested.
2. The population of items subject to negative confirmation procedures is made up of a large number of small account balances.
3. The auditor expects a low exception rate.
4. The auditor reasonably believes that recepients of negative confirmation requests will give requests adequate consideration.
Typically when negative confirmations are used what does the auditor do?
They put significant emphasis on effectiveness of internal controls, substantive tests of transactions, and analytical procedures.
Where does the auditor's choice of confirmation fall?
Falls along continuum, starting with the use of no confirmations, to using only negatives, to using both negatives and positives, to using only positives.
What are the primary factors affecting which type an auditor uses?
Materiality of total accounts receivable, the number and size of individual accounts, control risk, inherent risk, the effectiveness of confirmations as audit evidecnce, and the availability of other audit evidence.
When are confirmations most reliable?
When they are sent near the balance sheet date they are most reliable.
In order to conduct the audit in a timely manner what is sometimes done?
Sometimes necessary to confirm balances at interim date. This can be done if internal controls are adequate and con provide reasonable assurance that sales, cash receipts, and other credits are properly recorded between the date of the confirmation and the end of the accounting period.
If a decision is made to confirm balances before year end what must be done?
A roll-forward schedule that reconciles A/R must be prepared to reconcile the A/R at confirmation date to A/R at balance sheet date. Also do analytical procedures.
WHat are the major factors for sample size of confirming AR
Tolerable misstatement
Inherent risk
Control risk
Achieved detection risk from other substantive tests
Type of confirmation (positve or negative)
Some type of stratification is desirable for selecting balances for confirmation, an auditor considers both dollar size of individual accounts and the length of time an account has been outstanding.
In most audits where should auditors emphasize?
Emphasis should be on confirming larger and older balances because these are most likely to include a significant misstatement,
What does the auditor do in many cases?
In many cases, the auditor selects all accounts abovea certaind dollar amount and selects a random sample from the remainder.
For confirmations sent by mail what must the auditor do?
Auditor must maintain control of confirmations until they are returned from the customer.
What can the client assist with and what must the auditor do?
The client may assist with preparing the confirmations, but the auditor must be responsbile for mailing the confirmations outside the client's office.
What must be included?
A return address must be included in the envelopes to make sure tha undelivered mail is received by teh CPA firm. This ensures responses are mailed directly to the auditor.
WHat is innapropriate to regard
inappropriate to regard confirmations mailed but not returned as significant evidence. Nonresponses to positive confirmations to not count as evidence.
What do negative confirmations prove?
For negative confirmations auditor should conclude recipient received the confirmation request and and verified the information requested. Negative confirmations do provide some evidence of existence assertion.
When positive confirmatios are used what do auditing standards reuquirie?
They require follow up procedures for confirmations not returned by customers.
When customers have been sent 2-3 confirmations what must be done?
Then necessary to follow up with alternative procedures.
What is the objective of alternative procedures?
Alternative procedures determines by a means other than confirmation whther the nonconfirmed account existed and was properly stated.
What can an auditor do if people fail to respond?
Can examine subsequent cash receipts
Duplicate sales invoices
shipping documents
Correspondence with the client
What does an auditor look for in regards to subsequent cash receipts
Evidence of receipt of cash subsequent o the confirmation date includes examining remittance advices, entries in cash receipts journal, even subsequent credits in the A/R master file.
What is examining duplicate sales invoices useful for?
Useful for verifying the actual issuance of a sales invoice and the actual date of the billing.
What are shipping documents important for?
These are important in establishing whether the shipment was actually made and as a test of cutoff.
What can correspondence with the client indicate?
Usually the auditor does not need to review correspondence as a part of alternative procedures, but correspondence can be used to disclose disputed and questionable receivables not uncovered by other means.
When requests are returned by customers many times there are differences. What does the auditor have to do when there is a difference?
The auditor is responsible for figring out why there are differences.
What typically causes a difference?
Differences are caused by timing differences betwen the client's and customer's records. It is important to distinguish between timing differences and exceptions which represent misstatements of accounts receivables.
What are the 4 most commonly made types of misstatements?
1. Payment has already been made
2. Goods have not been received
3. The goods have been returned
4. Clerical errors and disputed amounts
Payment has already been made
reported differences typically arise when the customer has made payment before the confirmation date, but the client has not received the payment in time for recording before the confirmation date. Such instances should be carefully investigated to determine possibly cash receipts cutoff misstatement, lapping, or theft of cash.
Goods have not been received
These differences typically result because the client records the sale at the date of shipment and the customer records the acquisition when the goods are received. The time that the goods are n transit is often the cause of the differences reported on confirmations. These should be investigated to determine the possiblity of the customer not receiving the goods at all or the existence of a cutoff misstatement.
The goods have been returned
The client's failure to record a credit memo could have resulted from timing differences or the improper recording of sales returns and allowances, like other differences, these must be investigated
Clerical errors and disputed amounts
The most likely types of reported differences in a client's records are when the customer states that there is an error in the price charged for the goods, the goods are damaged, the proper quantity of goods was not received, ect. These differences must be investigated to determine whether the client is in error and the amount of the error.
When all differences have been resolved what must the auditor do?
Auditor must reevaluate internal control
What must misstatements be analyzed for?
Misstatements must be analyzed to determine whether it was consistent or inconsistent with the original assessed level of control risk.
What is necessary to generalize about?
It is necessary to generalize from the sample to the entire population of accounts receivable. Even though the sum of misstatements in the sample may not significantly affect the financial statements, the auditor must consider whether the population is likely to be materially misstated,
What should the auditor evaluate?
The auditor should always evaluate the qualitative nature of the misstatements found in the sample, regardless of the dollar amount of the estimated population misstatement. Even if estimated misstatement is less than tolerable misstatements for A/R the misstatements found in a sample can be symptomatic of a more serious problem.
What is the final decision based on?
Whether appropriate evidence has been obtained through tests of controls and substantive tests of trans, analytical procedures, cutoff procedures, confirmation, and other substantive tests to justify drawing conclusions about correctness of the stated balance.