Positive confirmations of accounts receivable are least likely to be used
A.When the relevant internal controls are effective.
B.In combination with negative confirmations.
C.If the auditor does not want a response when the debtor agrees with the balance.
D.When large balances are involved.
The correct answer and explanation is:
The correct answer is C. If the auditor does not want a response when the debtor agrees with the balance.
Explanation:
Positive confirmations are one of the methods used by auditors to verify accounts receivable balances. In positive confirmation, the debtor is asked to confirm whether the amount stated in the confirmation is correct or incorrect. This request is made regardless of whether the debtor agrees with the balance or not. The main goal of positive confirmation is to ensure the accuracy of the receivable balances and to provide the auditor with reliable evidence.
Let’s break down why option C is the correct answer:
- A. When the relevant internal controls are effective: This option does not apply to the use of positive confirmations. Effective internal controls can make the confirmation process more efficient by ensuring accurate records, but they don’t directly influence whether positive confirmations are used. In fact, positive confirmations are often used when there are concerns about the effectiveness of controls or when additional evidence is needed.
- B. In combination with negative confirmations: Positive confirmations can be used in combination with negative confirmations. Negative confirmations, in contrast, ask the debtor to respond only if they disagree with the balance, making them less reliable than positive confirmations. Auditors may use both methods, but the main characteristic of positive confirmation is that a response is requested regardless of agreement.
- C. If the auditor does not want a response when the debtor agrees with the balance: This is the key to understanding the question. Positive confirmations require a response regardless of whether the debtor agrees or disagrees with the balance. If an auditor does not want a response when the debtor agrees, they would likely use negative confirmations, which only require a response when there is disagreement. Hence, positive confirmations are least likely to be used in this scenario.
- D. When large balances are involved: Positive confirmations are often used when large balances are involved because they provide more reliable and direct evidence. Large balances tend to carry higher risk, so obtaining explicit confirmation from the debtor is essential for reducing audit risk.
In conclusion, positive confirmations are least likely to be used when the auditor does not want a response from the debtor when they agree with the balance, as this contradicts the nature of positive confirmations.