1.

What procedures should an auditor perform for a positive confirmation that is not
returned by the client's customer?
When expecting receipt of a positive confirmation from a customer auditors should pay
special care in ensuring the confirmations are received by the intended recipient.
Controlling the mailing from the addresses, phone numbers, electronic correspondence,
and to the returns should be done by the auditor directly and examined to ensure its
authenticity. Second and third requests should be sent to motivate responses from
uncooperative customers. If a positive confirmation is still not returned by a customer
an auditor should perform alternative procedures to ensure existence. This would entail
examining subsequence cash receipts, which is an effective test in providing strong
evidence the receivable existed. Further items to be examined are sales orders,
invoices, shipping documents, and correspondence files for past due accounts.
Getting confirmations delivered to the intended recipient requires auditors careful
attention. Auditors need to control the mailing of the confirmations, including the
addresses to which they are sent, and the confirmations should be returned directly to
the auditors. The confirmations should normally be addressed to the customers
accounts payable department. There have been cases in which confirmations were
mailed to company accomplices, who provided false responses. The auditors should
carefully consider features of the reply, such as postmarks, fax and telephone
responses, letterhead, e-mail, or other characteristics that may indicate a false
response. Auditors should follow up electronic and telephone responses to determine
their origin (e.g., returning the telephone
Call to a known number, looking up telephone numbers to determine addresses, or
using a directory to determine the location of a respondent). On the other hand, an
electronic confirmation process that creates a secure confirmation environment may
mitigate the risks of human intervention and misdirection. 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 motivateresponses 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
Often the clients customers are not willing or able to return the confirmation. They may
not be able if, for example, they are on a voucher system that lists payables by invoice
instead of by vendor account. The U.S. government is notorious for not returning
confirmations because records may be kept at various agencies. In these cases, auditors
must perform alternative procedures to ensure existence. These include examining (1)
subsequent cash receipts, (2) sales orders, invoices, and shipping documents, and (3)
correspondence files for past due accounts. Examining subsequent cash receipts is a
particularly effective test because if the customer paid the account, it provides strong
evidence that the receivable existed. This examination is often performed even when
the
customer has confirmed the account. The cash receipt should be traced to the
remittance advice and the deposit into cash. Pg. 291