The negative request form of accounts receivable confirmation may be used when the

During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should an auditor take?

Not accept the confirmation and select another customer’s balance to confirm.

Not accept the confirmation and treat it as an exception.

Accept the confirmation and file it in the working papers.

Accept the confirmation but verify the source and content through a telephone call to the respondent.

Accept the confirmation but verify the source and content through a telephone call to the respondent.

This answer is correct because while the confirmation may be accepted, the auditor should verify the source and content in some manner, perhaps via a telephone call.

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?

The auditor's combined assessed level of control risk and inherent risk is low.

Prior years' audits indicate a pattern of overstatement of account balances.

Recipients are likely to sign other types of positive confirmations without careful investigation.

Accounts receivable are immaterial to the entity's financial statements.

Recipients are likely to sign other types of positive confirmations without careful investigation.

This answer is correct because an auditor may reduce the risk relating to recipients signing confirmation requests without careful investigation by using positive confirmation requests that do not state the amount on the confirmation request (a "blank form" of confirmation request) and asking whether the confirming party fill in the amount or other information requested.

In which circumstance is the confirmation of receivables on October 31 most likely for a client with a December 31 year-end?

Tests of controls have revealed that the disbursements cycle is operating effectively.

The receivables balance is material.

Accounts were confirmed as of December 31 for the preceding year’s audit.

Appropriate audit tests indicate that control risk for receivables is low.

Appropriate audit tests indicate that control risk for receivables is low.

This answer is correct because when control risk for receivables is low the auditor may be more likely to confirm receivables at an interim date.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Send confirmations for all new customer balances incurred from the interim date to year-end.

Resend confirmations for any significant customer balances remaining at year-end.

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

Review cash collections subsequent to the interim date and the year-end.

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

This answer is correct because an auditor will review significant changes in balances.

Which of the following statements is correct concerning the use of negative confirmation requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Negative confirmation requests are effective when detection risk is low.

Unreturned negative confirmation requests indicate that alternative procedures are necessary.

Negative confirmation requests are effective when understatements of account balances are suspected.

Unreturned negative confirmation requests rarely provide significant explicit evidence.

The requirement is to identify the correct statement concerning the use of negative confirmation requests. Answer (a) is correct because AU-C 505 states that unreturned negative confirmation requests rarely provide significant evidence concerning financial statements assertions other than certain aspects of the existence assertion. Answer (b) is incorrect because positive, not negative, confirmation requests are normally used when a low level of detection risk is to be achieved. Answer (c) is incorrect because alternative procedures are not generally performed on unreturned negative confirmation requests since it is assumed that the respondent did not reply because of agreement with the balance on the confirmation request. Answer (d) is incorrect because respondents may not reply when misstatements are in their favor.

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

Including a list of items or invoices that constitute the account balance.

Restricting the selection of accounts to be confirmed to those customers with relatively large balances.

Requesting customers to respond to the confirmation requests directly to the auditor by fax or email.

Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.

Including a list of items or invoices that constitute the account balance.

This answer is correct because providing a list of items or invoices may make it easier for a respondent to reply; while any of the other replies may or may not increase the response rate, this one is most likely to because it may make obtaining the information much easier for individuals with information systems which are organized about invoices.

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the assessed level of control risk over the sale is low.

When the assessed level of detection risk over the sale is high.

When the combined assessed level of inherent and control risk over the sale is moderate.

When the combined assessed level of inherent and control risk over the sale is high.

When the combined assessed level of inherent and control risk over the sale is high.

This is incorrect because when the assessed level of control risk is low, a higher level of detection risk may be acceptable and thus confirming the terms of the sale may be less important.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose

Customers with credit balances.

Small account balances.

Individual overdue balances.

Individual invoices.

Individual invoices.

This is correct because sampling individual invoices may make it easier for customers to reply accurately (particularly when those customers use a voucher system in which liabilities are recorded by individual purchase).

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Examine the shipping documents that provide evidence for the existence assertion.

Verify the sources and contents of the faxes in telephone calls to the senders.

Consider the faxes to be nonresponses and evaluate them as unadjusted differences.

Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

Verify the sources and contents of the faxes in telephone calls to the senders.

To ensure that a fax is valid, the auditor would need to perform other procedures that would aid in verifying the authenticity of the fax. Telephoning the sender would provide additional evidence that the fax was authentic.

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

The recipients are likely to sign the confirmations without devoting proper attention to them.

Subsequent cash receipts are unusually difficult to verify.

Analytical procedures indicate that few exceptions are expected.

The combined assessed level of inherent risk and control risk is low.

The recipients are likely to sign the confirmations without devoting proper attention to them.

Using the blank form of confirmation of accounts receivable provides greater assurance that the recipient of the confirmation has verified that the information is correct. It is more likely to be used when the auditor is concerned that recipients will not devote proper attention to the confirmations.

The blank form of accounts receivable confirmations may be less efficient than the positive form because

Shipping documents need to be inspected.

Recipients may sign the forms without proper investigation.

More nonresponses to the requests are likely to occur.

Subsequent cash receipts need to be verified.

More nonresponses to the requests are likely to occur.

AICPA Professional Standards indicate that using blank confirmation requests may provide a greater degree of assurance about the information confirmed because of the need to fill in the amount. However, blank forms might also result in lower response rates because additional effort is required of the recipients. When lower response rates occur, the auditor may have to perform more alternative procedures making the confirmation effort less efficient.

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the assessed level of control risk over the sale is low.

When the assessed level of detection risk over the sale is high.

When the combined assessed level of inherent and control risk over the sale is moderate.

When the combined assessed level of inherent and control risk over the sale is high.

When the combined assessed level of inherent and control risk over the sale is high.

The auditor would be more likely to confirm certain relevant contract terms as the risk of material misstatement increases. In this case, the risk of material misstatement is said to be "high," which is consistent with the need to perform additional procedures to address revenue-recognition issues.

Which of the following statements is correct concerning the use of negative confirmation requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Negative confirmation requests are effective when detection risk is low.

Unreturned negative confirmation requests indicate that alternative procedures are necessary.

Negative confirmation requests are effective when understatements of account balances are suspected.

Unreturned negative confirmation requests rarely provide significant explicit evidence.

When negative confirmations are used, the respondent is asked to return the request only if there is a problem or error in the balance. Thus, it is assumed that the balances are correct unless the confirmation is returned. Unreturned negative confirmation requests, therefore, are considered to be evidence. This evidence is implied, it is not explicit.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

The use of negative accounts receivable confirmations requires:

1) a low risk of material misstatement;

2) a large number of small balances; and

3) an expected very low exception rate;

4) no reason to believe that the recipients of the confirmations would not review them properly.

Having a small number of accounts in dispute and an accounts receivable balance arising from sales to many customers with small balances meets two of the three criteria and would be more likely to justify the use of negative confirmations.