Question

Under which of the following circumstances would the use of the bank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

a.The recipients are likely to sign the confirmations without devoting proper attention to them.
b.Subsequent cash receipts are unusually difficult to verify.
c.Analytical procedures indicate that few exceptions are expected.
d.The combined assessed level of inherent risk and control risk is low.

Answer 1

The bank form of confirmations of accounts receivable is generally preferred when the combined level of inherent risk and control risk is low. When acquiring a loan, a borrower can reassure a lender through the provision of detailed financial information, a credit check, a cosigner, or collateral.

Step-by-step explanation:

When is a Bank Confirmation Preferable to Positive Confirmation?

The use of the bank form of confirmations of accounts receivable is most likely preferable to positive confirmations when the combined assessed level of inherent risk and control risk is low. This situation indicates that the likelihood of material misstatement due to error or fraud is low, and the internal controls in place are deemed effective. Other factors, such as subsequent cash receipts being unusually difficult to verify, or analytical procedures indicating that few exceptions are expected, might also lead to a preference for bank confirmation. However, if recipients are likely to give perfunctory attention to confirmations, this would not in itself be a sufficient reason to prefer bank confirmations.

Regarding the reassurance of a bank for a loan, some ways a borrower can reassure a bank that is faced with imperfect information about the borrower's ability to repay the loan include the provision of detailed financial information, a credit check, the addition of a cosigner, or offering collateral.