When the above conditions do not exist it is acceptable to use negative

When the above conditions do not exist it is

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When the above conditions do not exist, it is acceptable to use negative confirmations, but negative confirmations should not be used if the auditor believes the customer is likely to ignore the confirmation. Typically, when negative confirmations are used, the auditor is using a reduced control risk assessment in the audit of accounts receivable. It is also common to use negative confirmations for audits of hospitals, retail stores, and other industries where the receivables are due from the general public. In these cases, far more assurance is obtained from tests of internal control than from confirmations.It is also common to use a combination of negative and positive confirmations by sending the positives to accounts with large balances and negatives to those with small balances.8-3.It is acceptable to confirm accounts receivable prior to the balance sheet date if the internal control structure is adequate and can provide reasonable assurance that sales, cash receipts and other credits are properly recorded between the date of the confirmation and the end of the accounting period. Other factors the auditor is likely to consider in making the decision are the materiality of accounts receivable and the auditor’s experience in prior years. If the decision is made to confirm accounts receivable prior to year end, it is necessary to test the transactions occurring between the confirmation date and the balance sheet date by examining internal documents and performing analytical procedures at year end.8-4.South Technologies, Inc.(a) When confirmation requests are mailed to debtors whose accounts were written off as uncollectible, the auditors’ purpose is to determine that the receivables were genuine when they were first recorded in the accounts. In some fraud cases, fictitious accounts receivable have been created to cover up a shortage. Eventually these fictitious receivables must be disposed of; one method is to write off the fictitious accounts as uncollectible.(b)The South executive appears to believe the auditors are solely concerned with the collectibility of accounts and notes receivable. In fact, the confirmation process is primarily intended to establish that the receivables are genuine and
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Substantive Tests of Receivables and Sales8-3that the customers (or makers of notes) exist. Other audit procedures are followed to determine collectibility.8-5.The confirmation requests should go to the makers of the notes regardless of whether the notes have been discounted. The act of discounting a note receivable does not reduce the importance of the note being genuine and collectible. A company which discounts its notes receivable remains in a position of sustaining a loss if the makers of the notes fail to make payment at the maturity dates.
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  • Spring '16
  • Prof. Fernandez
  • ........., Receivables and Sales

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