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King, CPA, is auditing the financial statements of Cycle company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally accepted auditing procedure.

Required:
a. Under what circumstances could King justify omitting the confirmation of Cycle’s accounts receivable? In designing confirmation request, what factors are likely to affect King’s assessment of the reliability of confirmations that King sends?
b. What alternative procedures could King consider performing when replies to positive confirmation requests are not received?

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Answer:

King, CPA

Auditing the financial statements of Cycle Company

a-1 Circumstances under which the omission of the confirmation of accounts receivable may be justified by King:

1. Accounts receivable are immaterial because of their values.

2. Low risk concerning accounts receivable.

3. Reliance can be placed on analytics and substantive tests to detect misstatements.

4. Using confirmations may be ineffective.

a-2) Factors that are likely to affect King's assessment of the reliability of confirmations:

1. The assessed skills of the recipients to confirm their balances.

2. The existence of verifiable customer records.

3. Proper documentations of transactions.

b. The alternative procedures that King could consider performing when replies to positive confirmation requests are not received are:

1. The auditor can conduct substantive tests, with tests of detailed transactions and analytical procedures.

2. Examination of cash receipts, sales orders, invoices, shipping documents, and correspondence files.

Explanation:

Where accounts receivable balances are material, the auditor is required to send out requests to customers to confirm their balances.  The confirmation may be in the form of a negative, positive, or blank confirmation, depending on the prevailing circumstances and the assessed risks.

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