External Confirmation ch#14

Question 1

Can a client send confirmation to debtor or recieve the answer on the behalf of the auditor?

Answer 1

No it will be an indirect confirmation which isn’t valid only a direct confirmation is allowed.
Auditor to third party

Question 2

What if the management gives wrong address of the debtor or creditor to the auditor?

Answer 2

It will increase the risk of fraud

Question 3

If the debtor is bankrupt and no reply of the confirmation is received by the auditor what will the Auditor do?

Answer 3

The auditor will perform the alternate procedure of bankruptcy

Question 4

Can the auditor exempt small debtors while sending confirmation?

Answer 4

No he needs to collect sample from every class as immaterial can become material combinely

Question 5

Which assertions are verified by external confirmations?

Answer 5

Existence
Rights and obligations
Accuracy valuation and allocation.

Question 6

Which assertion is not verified by external confirmation?
A) cut off
B) rights and obligations
C)completeness
D)Existence

Answer 6

C)Completeness

Question 7

If time is limited how will an auditor get external confirmation quickly?

Answer 7

1) He can do interim audit
2)Email

Question 8

What are the conditions which need to be met in order to send negative confirmation?

Answer 8

1) large number of small balances
2)inherent and control risk are low
3) low exception rate
4) auditor is not aware of circumstances that confirming party will disregard the request

Question 9

If an auditor is performing interim audit what extra procedures he need to perform

Answer 9

1)Compare individual balances at year end with balances at interim date
2)For transactions between interim date and final date
a)select a sample of transactions and perform test of controls
b)select a sample of material transactions and perform tests of details with supporting documents.
3)Send confirmation at year end if necessary

Question 10

Which exception rate is considered high while sending negative confirmation?
A)more than 10%
B)less than 12%
C)Less than 15%
D)more than 15%

Answer 10

D)more than 15%

Question 11

do all 4 conditions needs to be met in order to send negative confirmation or only one is enough?

Answer 11

All need to be met

Question 12

A conclusion drawn as per working is there are no unrecorded liabilities as confirmations have been received from all selected parties and no differences were noted hence no further test is required
Is this statement valid?

Answer 12

This is the statement of completeness which isn’t verified by external confirmation.
For verifying completeness of liabilities good received note and analytical procedures(comparison with last year) are performed

Question 13

What is meant by asjusting event?

Answer 13

An event occured in next year but recorded in this year
Examples
1) Bankruptcy of debtors
2) NRV of inventory below cost
3)Decision of legal case
4) Return of defective inventory
5) Going concern inappropriate

Question 14

If a detective inventory is sent back what the client needs to do?

Answer 14

1)Sales return record
2)inventory at NRV

Question 15

What is positive confirmation, what’s the risk associated with ut and how can we tackle that risk?

Answer 15

A) it’s a request which asks confirming party ro reply in all cases whether he agrees or disagrees
B) Confirming party may respond without verification
C)Blank confirmation

Question 16

What’s negative confirmation and what is the risk associated with it?

Answer 16

It asks confirming party to reply only if he disagrees with the information.
There is no explicit evidence that confirming party recieved the request and verified it

Question 17

Identify the errors or omissions in the following format of confirmation letter

Answer 17

Error or omission can be date,indirect,reason of disagreement

Question 18

If an auditor gets a tempered confirmation what’s the course of action

Answer 18

Treat it as non response and request again and/or perform alternative procedure
Risk of fraud is increased as integrity is doubtful

Question 19

If a debtor respond sue us do whatever you can what’s the procedures of auditor?

Answer 19

He will perform the procedures of bad debt

Question 20

state the circumstances in which an auditor may decide not to circulate the request for direct confirmation

Answer 20

1)When inherent risk and control risk or assessed as low
2)when total balance is not material
4)when sufficient evidence can be obtained from other substantive procedures 4)when management request auditor not to send confirmation request and their is a reasonable justification for this.

Question 21

What are the factors that an auditor considers while designing the request for direct confirmation

Answer 21

1)Timing of confirmation 2)appropriate conforming parties
3)the information to be requested.
4)Type of confirmation 5)obtain signature of authorised representative.
6)appropriate procedure should be performed on a replies
7) preparation of summary and reaching a conclusion

Question 22

What procedure in auditor performs if thevconforming party responds via email?

Answer 22

Auditor obtain evidence whether sources is authentic and the communication process is secured and controlled(digital signature,encryption)

Question 23

What course of action will the auditor perform if the response of the conforming party is oral?

Answer 23

1) request balance in writing because oral response does not meet definition of confirmation letter.
2) if written response is not received this is same as non response.

Question 24

Define external confirmation identify any four situations where auditor can use direct confirmation.

Answer 24

It is a procedure of obtaining evidence by auditor directly from a third party in written form.
Confirmation procedure is used to confirm information from debtors,creditors,banks,and lawyers third party holding inventory of the company and investment held by brokers.

Question 25

What are the alternative procedures if positive confirmation from account receivable is not received?

Answer 25

1)examine cash received from customer of the balance sheet date obtain explanation for cash not received within credit period 2)inspect customers signed sales order sales invoice goods dispatch notes and other documents acknowledged by customer.
3)Examine correspondence with debtors lawyers opinion if an amount is disputed
4)Perform cut off test
5)Compare balance with monthly account statement sent by debtor.

Question 26

If a response from confirming party indicates general disagreement what procedures shall the auditor perform

Answer 26

1)Ask that client to Reconcile the balance
2)Reconciliation prepared by the client should be checked by the auditor to determine whether this exception is because of
a)timing difference
b)misstatement in record the client.
c)misstatements in records of confirming party.

Question 27

If the confirming party replies that the amount was paid on December 28 what course of action will the auditor perform

Answer 27

1)Auditor shell confirm that client received money after the year end.
2) if client received this amount before here and this will be a mistatement and the money received should be recorded this year.

Question 28

If the conforming party replies that we received these goods on January 3 what course of action will the auditor perform

Answer 28

Auditor should confirm that client dispatched goods before the year end
If client dispatched goods after the year end this will be a misstatement and sales recorded should be reversed this year.

Question 29

if the confirmation return undelivered because of wrong address what should the auditor do

Answer 29

in this case confirmation should be sent again after correcting address

Question 30

if the confirmation return undelivered because of non existent customer what will the auditor do

Answer 30

In this case risk of fraud will increase

Question 31

Should the auditor compare the misstatements with the sample or the population?

Answer 31

Auditor should calculate the projected misstatements first and compare it with the materiality level of the population

Question 32

If the management refuses to allow auditor to send confirmation request to a party and the refusal is reasonable what should the auditor do?

Answer 32

Auditor shalll try to perform alternative procedures to obtain evidence if auditor is unable to obtain evidence from alternative procedures it will be a scope limitation auditor shall express qualified opinion (if the effective material) or disclaimer of opinion(if the effect is pervasive).

Question 33

If the management refuses to allow auditor to send confirmation request and the refusal is not reasonable what course of action shall the auditor perform

Answer 33

Firstly discuss this issue with those charge with governance if still the issue is not resolved it will be a scope limitation imposed by management auditor shell Express qualified opinion (if the effect is material) or disclaimer of opinion( if the effect is pervasive)

Question 34

If the management refuses to allow the auditor to send confirmation request to a party what will be the implications on audit

Answer 34

1)Auditor shell revaluate integrity of Management in Shell revise risk of material misstatements statements and also modify nature timing in extent of audit procedures
2) if the auditor has serious concerns about integrity of Management he may also consider withdrawal from the engagement