External Confirmations
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CPA Auditing and Attestation (AUD) › External Confirmations
In an audit of a nonissuer retailer, the auditor sent positive accounts receivable confirmations to the largest customer (20% of total receivables). No response was received after a second request, and management states the customer is “too busy to respond.” Based on the circumstances, which response to a nonresponse is most appropriate?
Switch to negative confirmations for that customer because negative confirmations are sufficient when the balance is large.
Issue a disclaimer of opinion immediately because any nonresponse to a positive confirmation is a scope limitation.
Rely on management’s representation that the balance is collectible because the confirmation was properly mailed.
Perform alternative procedures such as examining subsequent cash receipts, shipping documents, and sales invoices supporting the year-end receivable balance.
Explanation
AU-C 505.12 requires auditors to perform alternative procedures when no response is received to positive confirmation requests, particularly for material balances. The key fact is that this customer represents 20% of total receivables (a significant balance) and has not responded to multiple requests. The correct answer (A) aligns with AU-C 505.12, which specifically identifies examining subsequent cash receipts, shipping documents, and sales invoices as appropriate alternative procedures to obtain evidence about the existence and valuation of receivables. Answer B is incorrect because negative confirmations cannot substitute for positive confirmations when the balance is large and material per AU-C 505.15. Answer C is incorrect because management representations alone cannot substitute for obtaining sufficient appropriate audit evidence per AU-C 580. Answer D is incorrect because nonresponses to confirmations do not automatically constitute scope limitations if alternative procedures can be performed per AU-C 705. The professional judgment framework is: for material balances with no confirmation response, always perform substantive alternative procedures rather than relying on less persuasive evidence.
In an audit of a nonissuer construction contractor, the auditor sent positive confirmations to a key subcontractor to confirm year-end accounts payable. The subcontractor responded with a balance $180,000 higher than the client’s accounts payable listing and included several invoices dated before year end that were not recorded by the client. What is the most appropriate follow-up procedure when a confirmation discrepancy is identified?
Request management to record the difference and, once recorded, no additional audit work is necessary.
Investigate the reconciling items by examining the unrecorded invoices, receiving reports, and subsequent disbursements to determine whether a year-end cutoff or completeness error exists.
Expand testing only if the client refuses to provide a management representation letter covering accounts payable completeness.
Ignore the discrepancy because vendor confirmations are less reliable than customer confirmations.
Explanation
AU-C 505.12 requires auditors to investigate all exceptions in confirmation responses, particularly those indicating potential unrecorded liabilities. The key fact is that the vendor confirmed $180,000 more than recorded, with invoices dated before year-end, indicating potential completeness issues with accounts payable. The correct answer (B) aligns with AU-C 505.12 and AU-C 500 requirements to obtain sufficient appropriate evidence by examining source documents to determine if a cutoff or completeness error exists. Answer A is incorrect because simply recording the difference without investigation doesn't address the root cause or ensure proper cutoff. Answer C is incorrect because vendor confirmations are equally reliable evidence, especially for completeness of liabilities. Answer D is incorrect because investigation of exceptions is required regardless of management representations. The professional judgment framework is: when vendor confirmations reveal unrecorded invoices dated before year-end, always investigate for completeness and cutoff errors through examination of receiving reports and subsequent disbursements.
During an audit of a nonissuer wholesaler, the auditor receives a positive accounts receivable confirmation response that agrees to the balance, but it is returned to the client’s office address and then forwarded to the auditor by the controller. The controller states the customer “always responds that way.” Which action should the auditor take based on the confirmation response?
Document the issue but rely on the response because confirmations are always more reliable than subsequent cash receipts testing.
Consider the response potentially unreliable due to lack of auditor control and perform additional procedures, such as re-confirming directly to an address obtained independently or performing alternative procedures.
Ask management to prepare a schedule reconciling the balance and, if it ties to the general ledger, accept the confirmation without further work.
Accept the response because the customer confirmed the balance and the controller’s explanation supports the process.
Explanation
AU-C 505.11 requires auditors to maintain control over confirmation requests and responses to ensure reliability, including direct mailing and receipt. The key fact is that the confirmation was returned to the client's address and forwarded by management, breaking the auditor's control over the confirmation process. The correct answer (B) aligns with AU-C 505.11 and .A12, which identify lack of auditor control as compromising reliability, requiring additional procedures such as re-confirming to an independently verified address or performing alternatives. Answer A is incorrect because responses routed through the client lack the independence required for reliable audit evidence. Answer C is incorrect because confirmations lose reliability when auditor control is compromised, regardless of their general persuasiveness. Answer D is incorrect because management-prepared reconciliations cannot validate compromised confirmations. The professional judgment framework is: when confirmation responses are intercepted or routed through the client, always treat them as potentially unreliable and either re-confirm directly or perform extensive alternative procedures.
You are performing an audit of a nonissuer and use electronic confirmations for cash balances. A bank confirmation is returned within minutes from a generic email address and includes no bank letterhead, no contact name, and account numbers that do not match the client’s bank statements. Which factor would most likely lead the auditor to question the reliability of a confirmation response?
The response was received electronically rather than on paper.
The response lacks indicators of authenticity and contains information inconsistent with other evidence, suggesting the response may not be from the intended confirming party.
The response includes account balances, which are considered less persuasive than responses confirming only account existence.
The response was received quickly, which indicates the bank has efficient confirmation procedures.
Explanation
AU-C Section 505.A18 highlights factors affecting confirmation reliability, such as authenticity and source verification, to ensure evidence is from the intended party. The electronic response from a generic email, lacking letterhead and with mismatched account numbers, raises doubts about its origin and accuracy. Option C is appropriate under AU-C 505.09, as inconsistencies suggest potential unreliability, prompting further verification or alternatives. Option A is incorrect because quick responses do not guarantee reliability per AU-C 505.A19; option B overlooks that electronic responses are acceptable if authenticated, and option D misstates that balances are more persuasive than existence confirmations. Reliability hinges on source validation, not format alone. In similar cases, apply a checklist for authenticity indicators like contact details and consistency with other evidence. This decision rule helps auditors discern valid from potentially fraudulent responses in confirmation processes.
You are auditing an issuer and send positive confirmations to customers. One response is received from a domain that differs slightly from the customer’s known domain (e.g., “.co” instead of “.com”) and the response confirms the balance exactly, but the customer’s accounts payable contact is different from prior-year correspondence. Which factor would most likely lead the auditor to question the reliability of a confirmation response?
Minor inconsistencies in sender identity information that could indicate the response was not received from the intended confirming party, requiring authentication.
Use of an email response rather than a mailed response, because PCAOB standards prohibit electronic confirmations.
The customer’s contact person changed, which by itself makes the confirmation invalid.
Exact agreement with the client’s records, which always indicates the response was copied from the client.
Explanation
PCAOB AS 2310.18 stresses authenticating confirmation sources, especially with inconsistencies like domain variations or contact changes. The slight domain difference and altered contact raise interception risks, requiring independent verification. Option B is correct per AS 2310.29, prompting authentication or alternatives. Option A misinterprets exact agreement; option C allows electronic responses if verified, and option D overstates contact changes. Authenticity drives reliability. Framework: Verify anomalies against known data. This mitigates fraud in confirmations.
During an audit of a nonissuer, the auditor sends positive confirmations of accounts payable to vendors. A vendor confirms a balance that is $60,000 higher than the client’s records and states the difference relates to goods shipped FOB shipping point on December 30. Management believes the goods arrived after year-end and were recorded in January. What is the most appropriate follow-up procedure when a confirmation discrepancy is identified?
Test cutoff by inspecting vendor invoices, shipping terms, receiving reports, and subsequent payments to determine whether the liability and inventory should be recorded at year-end.
Ignore the difference because it relates to inventory, not accounts payable.
Record an audit adjustment to accounts payable immediately because vendor confirmations override client records.
Ask management to negotiate with the vendor to reduce the confirmed balance before the auditor performs any additional testing.
Explanation
AU-C Section 505 requires investigating discrepancies in payable confirmations, such as shipment timing differences, to assess completeness and cutoff. The vendor's higher balance due to FOB terms suggests potential unrecorded liabilities. Option A aligns with AU-C 505.12 and AU-C 330.18 by testing cutoff via documents. Option B adjusts prematurely; option C ignores implications, and option D defers inappropriately. Investigation is key. Framework: Corroborate terms with evidence. This applies to liability assertions.
In an audit of a nonissuer, the auditor sends positive confirmations to customers. One customer replies and confirms the balance but adds that it has a side agreement allowing it to return unsold goods at any time for full credit. Management states no such agreement exists and that returns are not allowed. Which action should the auditor take based on the confirmation response?
Investigate the alleged side agreement by inspecting contracts, emails, and subsequent return activity, and evaluate implications for revenue recognition and disclosure.
Treat the response as a nonresponse because it includes additional information beyond the balance.
Ignore the side agreement comment because confirmations are intended only to confirm balances, not contract terms.
Request that management obtain a written retraction from the customer and accept it as conclusive evidence.
Explanation
AU-C Section 505 requires investigating additional confirmation information, like side agreements, for revenue implications. The customer's note suggests undisclosed terms affecting recognition. Option B aligns with AU-C 505.12 and ASC 606 by inspecting evidence. Option A ignores relevance; option C treats as nonresponse wrongly, and option D relies inadequately. Investigation is essential. Rule: Probe beyond balances for assertions. This applies to revenue audits.
You are the auditor of a nonissuer in an audit engagement and send positive confirmations to 30 customers for accounts receivable. One large customer responds that it owes $410,000, while the client’s records show $520,000 for the same invoices; the customer notes that $110,000 relates to goods returned before year-end but not yet credited. Which action should the auditor take based on the confirmation response?
Conclude the confirmation provides sufficient appropriate evidence because it was received directly from the customer and propose no additional procedures.
Replace the positive confirmations with negative confirmations because the response indicates the customer is unreliable.
Investigate the difference by examining subsequent credit memos, receiving reports, and return documentation, and evaluate whether a sales return or allowance adjustment is required.
Immediately qualify the audit opinion due to the discrepancy without performing further procedures.
Explanation
AU-C Section 505 addresses external confirmations, emphasizing the auditor's responsibility to investigate discrepancies in positive confirmation responses to obtain sufficient appropriate audit evidence. The key facts here include the customer's confirmation of a lower balance due to returned goods not yet credited, indicating a potential timing or cutoff issue in the client's records. Option B aligns with AU-C 505.12, which requires the auditor to perform further procedures to resolve differences, such as examining evidence of returns and evaluating adjustments. Option A is incorrect because discrepancies must be investigated rather than accepted outright, and option C is wrong as negative confirmations are not a substitute for unresolved positive responses per AU-C 505.A23; option D is inappropriate as qualifying the opinion is premature without further procedures under AU-C 705. In contrast, options like reclassifying or immediate qualification ignore the need for substantive testing. A useful framework is to always trace discrepancies to underlying documentation and assess misstatement implications before concluding on evidence sufficiency. This decision rule ensures audit evidence is reliable and supports assertions like existence and valuation in receivable testing.
You are auditing a nonissuer entity with many small customer balances and strong controls over billing and cash receipts. The auditor is considering using negative confirmations for accounts receivable. Which factor would most appropriately support the auditor’s decision to use negative confirmations rather than positive confirmations?
The assessed risk of material misstatement for receivables is low and the population consists of a large number of small, homogeneous balances.
The auditor intends to use negative confirmations because they provide stronger evidence than positive confirmations.
Management requests negative confirmations to reduce customer complaints and improve collection rates.
A few large, individually significant receivable balances make up most of the total accounts receivable.
Explanation
AU-C 505.15 establishes specific conditions that must exist for negative confirmations to provide sufficient appropriate audit evidence. The key fact is that the entity has low assessed risk, strong controls, and a population of many small, homogeneous balances. The correct answer (B) aligns with all three required conditions in AU-C 505.15: (a) low assessed risk of material misstatement, (b) large number of small, homogeneous balances, and (c) expectation that recipients will respond to negative requests. Answer A is incorrect because large, significant balances require positive confirmations per AU-C 505.A20. Answer C is incorrect because audit procedures cannot be selected based on management preferences or operational considerations. Answer D is incorrect because negative confirmations provide less persuasive evidence than positive confirmations per AU-C 505.A19. The professional judgment framework is: negative confirmations are only appropriate when all three conditions exist - low risk, homogeneous small balances, and expected response rates.
You are auditing a nonissuer distribution company and sent positive confirmations to several customers. One confirmation was returned from a free webmail address (not the customer’s domain) stating “Balance confirmed,” and the email header shows it was routed through an unknown server; the customer’s contact information in the client’s records does not match the sender. Which factor would most likely lead the auditor to question the reliability of a confirmation response?
The confirmation request was for an accounts receivable balance rather than for inventory held on consignment.
The response was obtained through a channel that raises doubt about the responder’s identity and authority to respond.
The customer is one of the entity’s largest customers by sales volume.
The confirmation was received electronically rather than by postal mail.
Explanation
AU-C 505.10 requires auditors to evaluate the reliability of confirmation responses, including consideration of risks that responses may not be from proper sources. The key fact is that the response came from an unverified email address that doesn't match the customer's known contact information, raising doubts about the responder's identity. The correct answer (B) aligns with AU-C 505.10, which specifically identifies doubts about the responder's competence, knowledge, or authority as factors affecting reliability. Answer A is incorrect because electronic confirmations can be reliable if proper controls exist per AU-C 505.A14. Answer C is incorrect because customer size doesn't affect confirmation reliability; it affects sample selection. Answer D is incorrect because the type of balance confirmed doesn't inherently affect reliability. The professional judgment framework is: when confirmation responses show indicators of potential fraud or manipulation (mismatched contact information, suspicious routing), treat the response as potentially unreliable and perform additional verification procedures.