Confirmations of receivables You are the auditor of Maple Bank for the year 2010 . Maple has a large number of customers with consumer loan accounts. The loan accounts have balances averaging $800 in a homogeneous population and the customers usually

Question

pay close attention to their balances. Your preliminary assessment of internal control over the loan area is that control risk is low and results of tests of controls support that assessment. Inherent risk is deemed to be lower as well. Discuss the confirmation process and the types of confirmations that may be used for the audit of Maple Bank. Which confirmation type would you select for Maple and why?

Answer 1

Auditors may select positive or negative confirmations depending on the circumstances. Positive confirmations are used in most situations where the client customer is asked to respond to the request in writing whether they agree of disagree with its contents. Negative confirms, on the other hand are only returned by the client customer if they disagree with the information listed. Negative confirmations may also only be used in certain situations. In the case of Maple Bank, an argument could be made for either form of confirmation to substantiate certain assertions relating to the loan receivable balances. Positive confirmations could be used with statistical sampling methods; however the auditor may forgo efficiency because of the tedious nature of positive form confirmation. Negative confirmations may be used if it is concluded that the balances represent a large number of bank customers and are small, environmental risk is assessed low and the customer is expected to give full consideration to the request. It may be a good idea for the auditor to use negative form confirmations in the case of Maple as consumer loans are usually smaller in balance ($800 average), the balances represent a large base of customers, and control risk and inherent risk are lower. The banking customers may be also be expected to read the confirmation and to check it against their balances. This form, however, may not be used with statistical methods of selecting the sample and projecting errors.
{Note: A student may also conclude that the balances are not small enough to use negative confirmations. This assessment is judgmental in nature and more information and experience would be needed to make this determination. The objective of this essay is to assess the student's understanding of positive versus negative confirmations and the confirmation process.}
The auditor must also keep control of the confirmations as the sample is selected; confirmations are prepared, mailed and then returned to the audit firm location. Though the confirmation may be on client letterhead and signed by the appropriate officer, the auditor will mail the confirmations and offer a return envelope addressed to the audit firm offices.
The auditor will also prepare a confirmation summary if positive confirmations are selected. This summary will assist the auditor in monitoring the extent of exceptions, including errors, and following up on such matters and non-returned confirmation letters. It will also be used in determining the extent of misstatements found in the sample for projection back to the population.