According to your textbook, to minimize the risk of material misstatement, auditors seek third-party verification of account balances by mailing customers their statements. Discuss the advantages of positive and negative confirmations, and ascertain whether or not email and oral confirmations are acceptable to increase customer response rates. Support your position.
The Third-party verification of the account balances is usually done to eradicate the chance of any misrepresentation, and false accounting. It is useful as it gives the company a legal trial and allows its customers and vendors to physically verify the transactions which have taken place in the past. Confirmation through email is also not only ethical, but also economical as well. The companies, vendors, and customers can also use it to maintain the digital record of the transactions and account statements. Even though the paper statements are also acceptable for the customers and suppliers who want to have the hard copies as well, digital email should be sent as well. The oral statements, on the other hand, are not ethical and also are very hard to track. Oral statements are one of the main fundamental bases of misstatements and confusion.
Positive confirmation and negative confirmation tend to offer a scope of improvement regarding the customer dissatisfaction level. It also encourages the customers to use online transactions which helps reduce time. The disadvantage that it offers is that positive confirmation is costly and requires a lot of follow-up work from the auditors.
Discuss the key differences between substantive tests of transactions and substantive tests of balances. Next, identify at least two (2) situations when an auditor should test account balances. Support your rationale with related examples of such circumstances.
The main aim of the audit tests is to give the auditors enough freedom to collect sufficient evidence for concluding with reasonable assurance of the nature and authenticity of the financial statements, making sure no misstatements are contained in the financial statement. The substantive test of the transactions is used for the verification of the dollar value of the transaction, while on the other hand, the substantive test of balances verifies the general ledger ending balances. In both types, the test is used for the examination of any material misstatements in the financial documents. A company with a better internal control system can easily detect such misstatements. These tests are conducted for the eradication of the detection, risk, or at least for its minimization. For example, one situation can be if revenue does not match with the sales value which was last reported, then the balances of accounts are compared to the cash balances. Another situation can be when the cash balance does not equate with the actual cash in hand. These tests are performed near the end of the year (ACCA Global, 2015).
Reference
ACCA Global. (2015, March 1). Audit evidence and specific considerations for certain items. Retrieved from https://www.accaglobal.com/us/en/member/discover/cpd-articles/audit-assurance/specific-considerations.html
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