CPA Quiz: External Confirmations
20 questions · exam conditions
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External ConfirmationsQuestion 1 of 20

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?

Perform alternative procedures such as examining subsequent cash receipts, shipping documents, and sales invoices supporting the year-end receivable balance.
Switch to negative confirmations for that customer because negative confirmations are sufficient when the balance is large.
Rely on management's representation that the balance is collectible because the confirmation was properly mailed.
Issue a disclaimer of opinion immediately because any nonresponse to a positive confirmation is a scope limitation.
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CPA Quiz

CPA Quiz: External Confirmations

Practice External Confirmations in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on External Confirmations, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

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?

  1. Perform alternative procedures such as examining subsequent cash receipts, shipping documents, and sales invoices supporting the year-end receivable balance. (correct answer)
  2. Switch to negative confirmations for that customer because negative confirmations are sufficient when the balance is large.
  3. Rely on management's representation that the balance is collectible because the confirmation was properly mailed.
  4. Issue a disclaimer of opinion immediately because any nonresponse to a positive confirmation is a scope limitation.
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.

Question 2

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?

  1. Request management to record the difference and, once recorded, no additional audit work is necessary.
  2. 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. (correct answer)
  3. Ignore the discrepancy because vendor confirmations are less reliable than customer confirmations.
  4. Expand testing only if the client refuses to provide a management representation letter covering accounts payable completeness.
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.

Question 3

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?

  1. Accept the response because the customer confirmed the balance and the controller's explanation supports the process.
  2. 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. (correct answer)
  3. Document the issue but rely on the response because confirmations are always more reliable than subsequent cash receipts testing.
  4. Ask management to prepare a schedule reconciling the balance and, if it ties to the general ledger, accept the confirmation without further work.
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.

Question 4

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?

  1. The response was received quickly, which indicates the bank has efficient confirmation procedures.
  2. The response was received electronically rather than on paper.
  3. The response lacks indicators of authenticity and contains information inconsistent with other evidence, suggesting the response may not be from the intended confirming party. (correct answer)
  4. The response includes account balances, which are considered less persuasive than responses confirming only account existence.
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.

Question 5

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?

  1. Exact agreement with the client's records, which always indicates the response was copied from the client.
  2. Minor inconsistencies in sender identity information that could indicate the response was not received from the intended confirming party, requiring authentication. (correct answer)
  3. Use of an email response rather than a mailed response, because PCAOB standards prohibit electronic confirmations.
  4. The customer's contact person changed, which by itself makes the confirmation invalid.
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.

Question 6

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?

  1. 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. (correct answer)
  2. Record an audit adjustment to accounts payable immediately because vendor confirmations override client records.
  3. Ignore the difference because it relates to inventory, not accounts payable.
  4. 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.

Question 7

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?

  1. Ignore the side agreement comment because confirmations are intended only to confirm balances, not contract terms.
  2. Investigate the alleged side agreement by inspecting contracts, emails, and subsequent return activity, and evaluate implications for revenue recognition and disclosure. (correct answer)
  3. Treat the response as a nonresponse because it includes additional information beyond the balance.
  4. 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.

Question 8

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?

  1. Conclude the confirmation provides sufficient appropriate evidence because it was received directly from the customer and propose no additional procedures.
  2. Investigate the difference by examining subsequent credit memos, receiving reports, and return documentation, and evaluate whether a sales return or allowance adjustment is required. (correct answer)
  3. Replace the positive confirmations with negative confirmations because the response indicates the customer is unreliable.
  4. 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.

Question 9

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?

  1. A few large, individually significant receivable balances make up most of the total accounts receivable.
  2. The assessed risk of material misstatement for receivables is low and the population consists of a large number of small, homogeneous balances. (correct answer)
  3. Management requests negative confirmations to reduce customer complaints and improve collection rates.
  4. The auditor intends to use negative confirmations because they provide stronger evidence than positive confirmations.
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.

Question 10

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?

  1. The confirmation was received electronically rather than by postal mail.
  2. The response was obtained through a channel that raises doubt about the responder's identity and authority to respond. (correct answer)
  3. The customer is one of the entity's largest customers by sales volume.
  4. The confirmation request was for an accounts receivable balance rather than for inventory held on consignment.
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.

Question 11

During an audit of a nonissuer software company, the auditor sends positive confirmations to customers that include the invoice number, amount, and payment terms. A customer responds confirming the total balance but does not provide any information about disputed invoices noted in the client's aging; the customer's reply states only "Total OK." Which action should the auditor take based on the confirmation response?

  1. Accept the confirmation as sufficient audit evidence because it confirms the total balance, and no further procedures are needed.
  2. Request a more complete response or perform targeted alternative procedures on the disputed invoices (e.g., inspect correspondence, credit memos, and subsequent cash receipts). (correct answer)
  3. Reclassify the confirmation as a negative confirmation because the customer did not explicitly disagree with the balance.
  4. Conclude the response is unreliable and exclude the customer from the sample without replacement.
Explanation: AU-C 505.08 states that incomplete or vague confirmation responses may require the auditor to request further information or perform alternative procedures. The key fact is that the customer's response confirms only the total without addressing known disputed items, making it an incomplete response for audit purposes. The correct answer (B) aligns with AU-C 505.08 and .12, requiring follow-up on exceptions and incomplete responses through additional procedures targeting the specific unaddressed items. Answer A is incorrect because confirming only the total without addressing disputes provides incomplete evidence about collectibility. Answer C is incorrect because positive confirmations remain positive regardless of response content; the classification depends on the request type. Answer D is incorrect because incomplete responses don't make confirmations unreliable; they require follow-up procedures. The professional judgment framework is: when confirmations provide incomplete information about known issues (disputes, credits, adjustments), always perform targeted procedures on the unaddressed items rather than accepting partial confirmations.

Question 12

During an audit of an issuer, the auditor sends positive confirmations for accounts receivable. A major customer does not respond after a second request; the balance is material and assessed as higher risk due to recent credit issues. Based on the circumstances, which response to a nonresponse is most appropriate?

  1. Perform alternative procedures such as examining subsequent cash receipts, shipping documents, and sales invoices to obtain evidence about existence and rights. (correct answer)
  2. Switch to negative confirmations for the nonresponding customer because negative confirmations are sufficient for high-risk balances.
  3. Treat the nonresponse as confirmation that the balance is correct because the customer would have replied if it disagreed.
  4. Issue a disclaimer of opinion immediately because any nonresponse on confirmations creates a scope limitation under PCAOB standards.
Explanation: PCAOB AS 2310 outlines procedures for handling nonresponses to positive confirmations, requiring alternative procedures when responses are not obtained, especially for material, higher-risk items. The nonresponse from a major customer with credit issues and material balance necessitates substantive testing to address existence and rights assertions. Option A complies with AS 2310.31, mandating alternatives like examining subsequent receipts and shipping documents to corroborate the balance. Option B is incorrect because negative confirmations provide less assurance and are unsuitable for high-risk items per AS 2310.23; option C wrongly treats nonresponse as agreement, contrary to AS 2310.33, and option D overstates the issue as an immediate disclaimer without attempting alternatives under AS 2305. In practice, nonresponses do not automatically limit scope if alternatives suffice. A transferable framework is to escalate procedures based on risk level, using alternatives to bridge evidence gaps. This approach ensures audit conclusions are supported despite confirmation limitations.

Question 13

During an audit of a nonissuer, the auditor receives a bank confirmation that confirms the year-end cash balance but does not respond to the auditor's request to confirm compensating balance arrangements and pledged cash. Those restrictions are relevant to presentation and disclosure. Which action should the auditor take based on the confirmation response?

  1. Treat the confirmation as complete because it confirms the cash balance and compensating balances are not part of cash.
  2. Perform additional procedures to obtain the missing information, such as contacting the bank through independently verified channels or inspecting loan agreements and bank correspondence. (correct answer)
  3. Assume there are no restrictions because the bank did not mention any.
  4. Issue an adverse opinion because incomplete confirmations automatically indicate material misstatement.
Explanation: AU-C Section 505 requires complete confirmation responses; incomplete ones, like missing compensating balance details, necessitate additional procedures for relevant assertions. The bank's omission of restrictions affects presentation and disclosure testing. Option B aligns with AU-C 505.12 by following up via independent channels or inspecting agreements. Option A treats as sufficient incorrectly; option C assumes absence without evidence, and option D overreacts to adverse opinion. Completeness is essential. Rule: Supplement incomplete responses with alternatives. This framework supports comprehensive evidence gathering.

Question 14

You are auditing an issuer and send positive confirmations for accounts receivable. Several customers respond with exceptions indicating they did not receive invoices until after year-end due to billing delays, while the client recorded revenue based on shipment dates. What is the most appropriate follow-up procedure when a confirmation discrepancy is identified?

  1. Expand testing of revenue cutoff and evaluate whether performance obligations were satisfied, using shipping terms, proof of delivery, and billing records to assess whether revenue was recognized appropriately. (correct answer)
  2. Conclude the exceptions are customer billing issues and therefore do not affect the issuer's financial statements.
  3. Send negative confirmations to the same customers to corroborate the positive confirmation exceptions.
  4. Limit procedures to obtaining a management representation that revenue recognition is appropriate.
Explanation: PCAOB AS 2310.33 requires following up on exceptions, such as billing delays, to assess revenue timing. Multiple exceptions indicate potential cutoff misstatements. Option A complies with AS 2310 and AS 2410 by expanding cutoff testing. Option B dismisses impact; option C adds ineffective steps, and option D limits to representations. Exceptions demand expansion. Rule: Scale testing to exception patterns. This ensures accurate recognition.

Question 15

In a nonissuer audit, the auditor receives a customer confirmation that indicates a balance due of $200,000, but the confirmation is returned to the client's accounts receivable clerk, who then forwards a scanned copy to the auditor. The auditor did not receive the response directly and cannot verify the original. Which action should the auditor take based on the confirmation response?

  1. Accept the scanned response because the amount agrees to the client's records and scanning does not affect reliability.
  2. Treat the response as potentially unreliable and obtain the confirmation directly from the customer or perform alternative procedures to obtain sufficient appropriate evidence. (correct answer)
  3. Rely on management's representation that the scan is a true copy of the original confirmation.
  4. Document the issue but take no further action because the confirmation was completed by the customer.
Explanation: AU-C Section 505.08 requires auditors to maintain control over confirmations, including direct receipt to ensure reliability. The response forwarded via client scan breaks control, risking alteration. Option B follows AU-C 505.A10 by treating as unreliable and seeking direct or alternative evidence. Option A ignores control; option C relies on representations, and option D documents without action. Control is fundamental. Framework: Reestablish direct channels for compromised responses. This preserves evidence integrity.

Question 16

During an audit of a nonissuer, a major vendor does not respond to a positive confirmation of accounts payable, and the client has weak controls over purchasing and receiving. The payable balance is material and there are few subsequent disbursements due to cash constraints. Based on the circumstances, which response to a nonresponse is most appropriate?

  1. Perform a search for unrecorded liabilities by examining subsequent invoices, unmatched receiving reports, and vendor statements, and consider contacting the vendor through independently obtained contact information. (correct answer)
  2. Treat the nonresponse as evidence that the payable is not owed because the vendor would respond if money were due.
  3. Rely on management's inquiry responses because controls are weak and confirmations are unlikely to be effective.
  4. Propose an adjustment to reduce accounts payable to zero because the vendor did not confirm the balance.
Explanation: The professional standard being tested is AU-C Section 505, which addresses external confirmations and the auditor's response to nonresponses in the context of auditing accounts payable balances. The key facts include the nonresponse to a positive confirmation from a major vendor, weak internal controls over purchasing and receiving, the materiality of the payable balance, and limited subsequent disbursements due to cash constraints, all of which necessitate alternative audit procedures to obtain sufficient appropriate evidence. Choice A aligns with AU-C 505 by recommending alternative procedures such as searching for unrecorded liabilities through examination of subsequent invoices, unmatched receiving reports, and vendor statements, and independently contacting the vendor, which is appropriate when confirmations are ineffective or nonresponsive. Choice B is incorrect because nonresponses to positive confirmations do not provide audit evidence under AU-C 505, and auditors cannot assume the absence of a response confirms the balance is not owed; choice C is wrong as AU-C 500 emphasizes that inquiry alone is insufficient evidence, especially with weak controls, and cannot substitute for substantive procedures. Choice D is inappropriate because proposing an adjustment to zero lacks evidential support and violates AU-C 330's requirement for sufficient evidence to support account balances. A transferable professional judgment framework for evaluating confirmation nonresponses involves assessing the risk of material misstatement, considering control effectiveness, and designing alternative procedures tailored to the circumstances to achieve audit objectives. In similar scenarios, auditors should prioritize corroborative evidence from independent sources over management representations when confirmations fail to yield responses.

Question 17

During an audit of a nonissuer, the auditor mails positive confirmations for a loan payable directly to the bank using an address provided by management. The response is received on bank letterhead but the phone number on the letterhead matches the client's main line, and the signature appears to be the client controller's. Which factor would most likely lead the auditor to question the reliability of a confirmation response?

  1. The confirmation was on letterhead, which increases reliability regardless of other circumstances.
  2. The confirmation includes the interest rate and maturity date, which are subjective terms.
  3. Indicators suggest the response may not have come from the bank (management-provided address and apparent management involvement), requiring the auditor to verify the source independently. (correct answer)
  4. The confirmation relates to a liability rather than an asset, which is inherently less reliable to confirm.
Explanation: AU-C Section 505.09 emphasizes verifying the authenticity of confirmation responses to ensure they are from the intended confirming party and free from management influence. The response's phone number matching the client's and signature resembling the controller's indicate possible interception or fabrication. Option C is appropriate under AU-C 505.A19, requiring independent verification of the source due to these red flags. Option A is incorrect as letterhead alone does not confirm authenticity; option B misidentifies subjective terms as the issue, and option D wrongly assumes liabilities are less reliable to confirm. Authenticity is key to evidence reliability. In similar situations, cross-check response details against independent sources. This framework mitigates risks of manipulated confirmations in audits.

Question 18

An auditor receives an oral response to a positive accounts receivable confirmation request from a customer's accounts payable clerk. What is the auditor's most appropriate next action regarding this response?

  1. Document the oral response in the workpapers as sufficient evidence because it came from the customer.
  2. Request that the responding party provide a written confirmation directly to the auditor. (correct answer)
  3. Ask the client's management to have the customer send a written response to the client, who will then forward it to the auditor.
  4. Treat the oral response as a non-response and immediately perform alternative procedures.
Explanation: An oral response to a confirmation request does not meet the definition of an external confirmation because it is not a direct written response. Auditing standards require the auditor to obtain the confirmation in writing. Therefore, the auditor should request that the customer follow up the oral response with a written one sent directly to the auditor. Treating it as sufficient evidence (A) is incorrect. Routing the response through the client (C) would compromise its reliability. While alternative procedures (D) may eventually be necessary if a written response is not received, the immediate next step is to request one.

Question 19

An attorney's response to an auditor's inquiry letter is limited in scope and does not comment on a material pending lawsuit listed in management's analysis. What is the auditor's most appropriate action?

  1. Issue a qualified opinion or a disclaimer of opinion due to a scope limitation.
  2. Rely on management's representations as sufficient evidence for the matter.
  3. Seek clarification from the attorney and consider requesting the client to authorize a more complete response. (correct answer)
  4. Add an emphasis-of-matter paragraph to the audit report highlighting the uncertainty.
Explanation: A limited response from legal counsel constitutes a potential scope limitation. Before modifying the audit report, the auditor must attempt to resolve the limitation. The appropriate first step is to communicate with the attorney to understand the reasons for the limited response and ask the client to authorize the attorney to provide the missing information. If these efforts fail and the matter is material, a modified opinion (A) may be necessary. Relying solely on management's representation (B) is insufficient. An emphasis-of-matter paragraph (D) is used for matters appropriately presented or disclosed, not for unresolved scope limitations.

Question 20

An auditor sends a confirmation request to a major vendor to test accounts payable. The vendor's response agrees with the client's records. This response provides the strongest evidence regarding which assertion for accounts payable?

  1. Valuation.
  2. Completeness.
  3. Existence. (correct answer)
  4. Rights and Obligations.
Explanation: Confirming a recorded payable with a vendor provides strong evidence that the liability exists (existence assertion). The vendor's agreement with the recorded balance confirms that the client owes this amount to the vendor. While this procedure also provides some evidence about valuation, existence is the primary assertion being tested. Completeness (the risk that payables are understated due to unrecorded liabilities) cannot be effectively tested by confirming recorded balances - it would require procedures like selecting from vendor statements or examining subsequent payments.