Final answer:
The correct answer is option C. The most appropriate audit procedure when customers fail to respond to second request confirmation forms for year-end past due balances is to intensify the study of the entity's system of internal control with respect to receivables, to identify potential weaknesses and issues with receivables management.
Step-by-step explanation:
The question relates to an appropriate audit procedure when customers with substantial year-end past due balances do not reply after a second request for confirmation. In this scenario, the most suitable audit approach is to intensify the study of the entity's system of internal control with respect to receivables. This option indicates a more profound examination into how the entity manages and controls its receivables to identify any weaknesses or issues that could explain the lack of responses to confirmation requests.
Examining shipping documents, reviewing collections during the year, or increasing the balance in the allowance for uncollectible accounts might also be useful in certain contexts. However, in this case, understanding the internal control system will help to assess whether there are broader issues affecting receivables management that could lead to unreplied confirmations and potential misstatements in the financial statements.
This procedure is a proactive step towards ensuring the reliability of the financial reporting system and uncovering any possible risks associated with receivables collection. It helps determine if the current internal controls are sufficient and are being adhered to, or if improvements are needed to ensure the accuracy of accounting for receivables.