1.

Under what circumstances would a positive confirmation of accounts receivable be

preferable to a negative confirmation?
A positive confirmation of accounts receivable is preferable to a negative confirmation when
verification from a customer is needed on a balance. A blank positive confirmation can be used
to provide better evidence from the customer of any discrepancy as it requires the customer to
search their own records. The positive form is commonly used when individual balances are
relatively large or when accounts are in dispute since material misstatements are not considered
as low risk as when smaller balances are involved.
A positive confirmation asks the customer to respond whether the balance is correct
or incorrect. See Exhibit 7.9 for an example of a positive confirmation. A variation of the
positive confirmation is the blank form. A blank confirmation does not contain the
balance; customers are asked to fill it in themselves. The blank positive confirmation
may produce better evidence because the recipients need to get the information
directly from their own records instead of just signing the form and returning it with no
exceptions noted. (However, the effort involved on the part of the recipient may cause a
lower response rate.) As illustrated in several of the Audit Insights, the auditors must
follow up on all exceptions. For example, they may choose to examine the bank deposit
that includes a check mentioned by the customer. The reason for any discrepancy will
have to be investigated by the client, and the audit team will examine corroborative
evidence of the clients resolution.
The positive form asks for a response. The negative form asks for a response only if
something is wrong with the balance; thus, lack of response to negative confirmations is
considered evidence that the account is fairly stated. The positive form is by far the
more common and is used when individual balances are relatively large or when
accounts are in dispute. Positive confirmations may ask for information about either the
account balance or specific invoices, depending on knowledge about how customers
maintain their accounting records. The negative form is used mostly when the risk of
material misstatement is considered low, when a large number of small balances is
involved, and when the clients customers can be expected to consider the
confirmations properly. Auditors must use these confirmations with great care. Pg.287
For example, encryption, electronic digital signatures, and procedures to verify website
authenticity may improve the security of the electronic confirmation process. Second
and third requests should be sent to motivate responses to positive confirmations, and
auditors should audit nonresponding customers by alternative procedures. Furthermore,
the lack of response to a negative confirmation is no guarantee that the intended
recipient received it or read it. Exhibit 7.11 illustrates some common confirmation
responses and the appropriate follow-up action. pg.290
Confirmation of receivables may be performed at a date other than the year-end. When
confirmation is done at an interim date, the audit firm is able to spread work throughout
the year and avoid the pressures of overtime that typically occur during busy season.
In addition, the audit can be completed sooner after the year-end date if confirmations
have been done earlier. The primary consideration when planning confirmation of
receivables before the balance sheet date is the clients internal control over
transactions affecting receivables. Pg.291