Question

(LO 8) Refer to the Auditing Standards Exhibit inside the front cover of this textbook. Identify the relevant auditing standards (PCAOB, AICPA, and IAASB) relating to external confirmations. Locate the standards on each organization’s website.

BELOW ARE THE STANDARDS, YOU DO NOT NEED ANY MORE INFORMATION!!! LOOK UP ON THEIR SITES

The relevant standards are: AS 2310, AU-C 505, and ISA 505.

1. What generalizations are applicable to audit evidence with respect to confirmations?

2. What do the standards direct the auditor to do if management refuses to allow the auditor to send a confirmation request?

3. Comment on similarities or substantive differences between the standards for each standard-setting body.

Answer 1

1. What generalizations are applicable to audit evidence with respect to confirmations?

Ans.: - Confirmation is undertaken to obtain evidence from third parties about financial statement assertions made by management.

Positive forms provide audit evidence only when responses are received from the recipients; nonresponses do not provide audit evidence about the financial statement assertions being addressed.

In determining the effectiveness and efficiency of employing confirmation procedures, the auditor may consider information from prior years' audits or audits of similar entities. This information includes response rates, knowledge of misstatements identified during prior years' audits, and any knowledge of inaccurate information on returned confirmations. For example, if the auditor has experienced poor response rates to properly designed confirmation requests in prior audits, the auditor may instead consider obtaining audit evidence from other sources

There may be situations in which the respondent, because of timeliness or other considerations, responds to a confirmation request other than in a written communication mailed to the auditor. When such responses are received, additional evidence may be required to support their validity. For example, facsimile responses involve risks because of the difficulty of ascertaining the sources of the responses. To restrict the risks associated with facsimile responses and treat the confirmations as valid audit evidence, the auditor should consider taking certain precautions, such as verifying the source and contents of a facsimile response in a telephone call to the purported sender. In addition, the auditor should consider requesting the purported sender to mail the original confirmation directly to the auditor. Oral confirmations should be documented in the workpapers. If the information in the oral confirmations is significant, the auditor should request the parties involved to submit written confirmation of the specific information directly to the auditor.

Confirmation of accounts receivable is a generally accepted auditing procedure. As discussed in paragraph .06, it is generally presumed that evidence obtained from third parties will provide the auditor with higher-quality audit evidence than is typically available from within the entity. Thus, there is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless one of the following is true:

• Accounts receivable are immaterial to the financial statements.

• The use of confirmations would be ineffective.fn 4

• The auditor's combined assessed level of inherent and control risk is low, and the assessed level, in conjunction with the evidence expected to be provided by analytical procedures or other substantive tests of details, is sufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions. In many situations, both confirmation of accounts receivable and other substantive tests of details are necessary to reduce audit risk to an acceptably low level for the applicable financial statement assertions.

2. What do the standards direct the auditor to do if management refuses to allow the auditor to send a confirmation request?

If management refuses to allow the auditor to perform external confirmation procedures, the auditor should

a. inquire about management’s reasons for the refusal and seek audit evidence about their validity and reasonableness.

b. evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing, and extent of other audit procedures; and

c. perform alternative audit procedures designed to obtain relevant and reliable audit evidence.

3. Comment on similarities or substantive differences between the standards for each standard-setting body.

The major similarities related to the confirmation procedures and management refusal.