ACC614DiscussionsWeek 4 - Discussion 1- Confirmation of Trade Account Receivables

Week 4 - Discussion 1

L. King, CPA, is auditing the financial statements of Cycle Company, a client with receivables from customers arising from the sale of goods in the ordinary course of business. King is aware that confirming accounts receivable is a generally accepted auditing procedure. Referencing this week’s lecture, please answer the following questions:

· Under what circumstances could King justify omitting the confirmation of Cycle’s accounts receivable?

Since the auditor has the burden of proof, King CPA must provide evidence to avoid including Cycle’s AR confirmation: The importance of receivables is minuscule. Second, the results can’t be trusted since we know from previous years' data or have had similar experiences. Third, adequate and reliable evidence may be gathered by analytical and other substantive techniques (Louwers, Sinason, Strawser, Thibodeau, 2015, p.287).

· In designing a confirmation request, what factors likely affect King’s assessment of the reliability of confirmations that King sends?

The two generally used verification forms are a negative and a positive confirmation. A positive affirmation would ask the Bicycle Company client to indicate whether the balance showing is proper or wrong. Furthermore, in a representation of reality, King could leave the accounting reporting blank & ask the consumer to fill it (pushing the customer to assess their AR rather than simply signing a form.) On the other hand, a negative confirmation asks a consumer to indicate whether they feel the amount is inaccurate (Louwers, Sinason, Strawser, Thibodeau, 2015, p.287) (Louwers, Sinason, Strawser, Thibodeau, 2015, p.287).

With the preceding said, King has to bear in mind that as an inspector, he needs to prove the existence and value of AR and which confirmations would assist him in accomplishing this subjective. Finally, King should remember that just because Cycle Corporation reports accounts receivable doesn’t indicate that those accounts are recoverable; he should review the AR and record the results in an age trial balance.

· What alternative procedures could King consider performing when replies to positive confirmation requests are not received?

Again, as previously indicated, the burden of evidence is with the auditor, and as such, if King cannot reconcile the positive confirmations or feels that there is a misstatement, she has to

1. Examining the following cash receipts

2. Matching cash receipts to AR

3. Following the Cycle from Order->Shipping-> Invoice ->payment. Confirm that there is no gap in the process

4. Correspondence with customers

5. Whether there is a consistent inaccuracy in any of the above, evaluate if fraud may have occurred.

6. Determine the reason for the misstatement

7. Extrapolate the misstatements across the population to point out where the error occurred or started.

Ultimately, the auditor must verify that they have studied, evaluated, and tested all the relevant information to validate that the financials are correct. If they cannot ascertain correctness from customer confirmations, investigation and analysis must continue to ensure integrity.

References

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services (6th ed.). New York, NY: McGraw-Hill. ISBN: 9780077862343.