Question

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?

1) The positive confirmation form must always be used to confirm all balances regardless of size.
2) A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
3) A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables.
4) The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

Answer 1

The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory. Option 4 is correct.

Step-by-step explanation:

The correct statement regarding the auditor's use of confirmations is option 4: The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

Positive confirmation requests are used when the auditor wants the recipient to respond directly (either by confirming or disputing) the accuracy of the information provided. This form is typically used when the auditor believes the controls related to the accounts receivable system are reliable.

Negative confirmation requests, on the other hand, ask the recipient to respond only if they disagree with the information provided. This form is generally used when the auditor believes that the controls related to the accounts receivable system are weak.