Revenue Cycle M1

Question 1

What are positive confirmations?

Answer 1

• A substantial number of accounts are expected to be in dispute
• Accounts receivable balance is comprised of accounts from a few major customers.
• Requests made for the customer to respond affirmatively.
• Should be used when the control environment is weak, control and inherit risk is high, risk of material misstatement is high.
• Effective when balances are overstated.
• A small number of accounts are involved.
• A large number of errors are anticipated.

Question 2

What are blank positive confirmations?

Answer 2

• should be used if recipients are likey to sign confirmations without careful investigation.
• Are Positive Confirmations that customer needs to fill in.
• Should be used when the control environment is weak, control risk is high, risk of material misstatement is high.
• Use when many exceptions are expected
• Provides a greater level of assurance than positive confirmations.
• Effective when balances are overstated

Question 3

What are negative confirmations?

Answer 3

• Lower level of assurance than positive confirmations.
• The risk of material misstatement is low (ie. strong control environment)., detection risk is high.
• Customer to respond only if the balance is misstated.
• Small number of accounts in dispute, with many customers, with small balances. (ex. utility co.)
• Use when there is a low expected exceptions.
• A large number of small account balances.
• Effective when balances are overstated.

Question 4

What assertions do confirmations of accounts receivables prove?

Does the client have a right to the receivable?

Does the receivable exist?

Answer 4

• Existence
• Rights and Obligations

Question 5

What are the GAAP rules regarding A/R Confirmations?

Confirmations are used exclusively as a substantive test

Answer 5

• Confirmation responses received electronically should be verified by calling the sender.
• Verification of subsequent cash receipts is an alternate procedure to confirm year-end receivables when confirmations are not returned by the client customers.
• Confirmations are not required if the balance of receivables is immaterial.

Question 6

What does the rights and obligations assertion refer to?

Answer 6

Rights and obligations deal with whether assets
are the rights of the entity and liabilities are the obligations of the entity

Question 7

What are the acceptable reasons not to use AR Confirmations?

Must document the alternative procedures used

Answer 7

• If the auditor determines that the client’s accounts receivable
  balances are immaterial.
• When inherent and control risk are very low and other audit
  procedures can be used.
• When the auditor determines that the use of accounts
  receivable confirmations will be ineffective.