Audit standards indicate that there is a presumption that auditors will confirm
ID: 2496650 • Letter: A
Question
Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests.
Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices.
Should Jenner & Jenner CPAs send accounts receivable confirmations?
How should the auditors mitigate the risk associated with both very large and very small balances?
Because so many customer balances consist of multiple invoices, what could the auditors do to eliminate unnecessary reconciliation?
What procedures can be performed on customers who do not respond?
Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests.
Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices.
Explanation / Answer
Yes Jenner & Jenner CPAs must send accounts receivable confirmations, as it is a requirement of auditing standards and also an important auditing practice The auditor must use the ABC sampling method wherby all the balances can be grouped under different categories A group would consist of top balances covering almost 70% of the total balance due. B consisiting of medium range balances covering 20% of total balances C consisting of the small balances covering about 10% of total balances. samples can be taken from all the 3 category thus mitigating the risk of both very large and small balances. all the invoices which have been collected or due to be collected within short period of time (i.e.) within the stipulated credit period can be removed from the reconcilation statement thus reducing the invoice counts. Substantive audit testing procedures must be applied for customers who donot respond.
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