Steps In Confirmation Process
The steps in the process of confirming receivables follow: Step-1. Obtain Aged Schedule of Accounts Receivable
The auditor should obtain an aged schedule of accounts receivable as of the confirmation date. He or she should apply the following procedures to this schedule:
Determine that totals are correct.
Compare all or a selected sample of account balances with the account balances in the accounts receivable subsidiary ledger.
Investigate credit balances. Step-2. Select Accounts for Confirmation
Auditors have used, and some continue to use, judgment in selecting accounts for confirmation. Statistical sampling methods, however, are ideal for the selection process.
Whatever method of selection is
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The confirmation requests always should remain in the auditor’s custody or under his or her supervision until mailed. Step-4. Process Responses to Confirmation Requests
When confirmation replies are received, the auditor should do the following:
[1]. Enter for each account the following:
Date received.
Amount confirmed.
[2]. If the amount confirmed differs from the account balance, the following should be done:
Photocopy confirmation reply.
Give photocopy to client and request that the difference be reconciled and provide documentation for reconciling items.
Review documentation for reconciling items.
If documentation is satisfactory, enter reasons for difference in receivable confirmation schedule.
[3]. If the amount confirmed differs from the account balance and the client cannot satisfactorily reconcile the difference, the auditor should do the following:
If the difference is small, the auditor may ignore it. If there are a significant number of small differences, however, the auditor should analyze them. If the analysis of the significant number of small differences indicates a deficiency in the receivable controls, the auditor may have to apply additional auditing procedures to satisfy himself or herself of the accounts receivable balance.
If the difference is significant, request the client to correspond with the debtor. Make certain the correspondence states that the
E. Why does the auditor not use the same tolerable misstatement or percentage of account balance for all financial statement accounts?
Reviewing the trial balance for the entire year to see all transaction are accurately accounted for.
We conducted several processes to test the accounts receivable of Wealthy Watches Inc. At the beginning, we agreed the balance of the accounts receivable detail listing to the trial balance and subsequently to the financial statements to ensure completeness of the population.
Also he may conduct bank reconciliations on pertinent accounts to make sure no discrepancies or misstatements are found. The auditor should also perform vertical and horizontal analysis for the income statements and balance sheets by the use of ratios.
Auditors also evaluate the client’s recording of transactions by verifying the monetary amounts of transactions, a process called substantive tests of transactions. For example, the auditor might compare the unit selling price on a duplicate sales invoice with the approved price list as a test of the accuracy objective for sales transactions. Like the test of control in the preceding paragraph, this test satisfies the accuracy transaction-related audit objective for sales. For the sake of efficiency, auditors often perform tests of controls and substantive tests of transactions at the same time.
4. Additional testing may still be required even if the error is corrected by the client. Many other errors during the month of April could have occurred on the accounting clerk’s watch that the auditor needs to do further testing to be sure no material misstatements are present. Some of these testing could be seeing what other duties the accounting clerk had during that month. Checking the client’s internal control for the entire entity could also be necessary to ensure that controls are in place for training employees that may need to fill the roles of a peer.
In order to confirm the accounts receivable balances, I decided to use positive confirmations since this was my first time auditing the company and the collateral for the loan would be the receivables. The confirmations helped to verify the accuracy and existence of the accounts. I also calculated the Receivables Turnover Ratio in order to better evaluate the overall success of collection on accounts. The sample size that I chose was determined by the factors of tolerable misstatement, inherent risk, control risk, achieved detection risk
1. The Allowance for uncollectible accounts currently has a credit balance of $900. After analyzing the accounts in the accounts receivable subsidiary ledger, the company's management estimates that uncollectible accounts will be $15,000. What will be the amount of uncollectible accounts expense reported on the income statement?
Identify the accounts that you would test, and select at least three (3) analytical procedures that you would use in your audit.
1a) What should the auditor consider when determining whether an account should be considered significant?
The total Accounts Receivable balance in the records of $4,752,257.70 was verified by setting a filter of
The allowance for doubtful accounts is lower than last year even though the receivables and the revenue are higher. This does not follow any form of consistency in that case. GAAP only allows the establishment of the allowance for doubtful accounts that are supported by appropriate analyses and that the policy is well documented and applied consistently from period to period. Again, without additional information the consistency item is an issue here.
b. Trace the line item “Balance per Bank Statement” – Accuracy and Existence (AU-C 315.A114 a-iii, b-i)
The proportion of the total dollar amount receivable I included in the confirmation request is in “Account Receivable Aging Analysis” by diving the total amount that is collectible “C” by the total amount of sales. The result is 82% ($9,803,430/$11,920,028) of the total dollar balance in accounts receivable.
Analytical procedures can often point to areas that are out of sync with the prior results of the firm. Auditors should look closely at changes in the gross profit ratio and unusual changes in revenues or expenses. Once unusual results have been identified, auditors must search for reasonable explanations. If the explanations provided seem implausible then the auditor must expand the scope of testing and obtain additional corroborating evidence.