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Bud’s Big Blue Manufacturing

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on 7 May 2015

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Transcript of Bud’s Big Blue Manufacturing

Bud’s Big Blue Manufacturing

Bud’s Big Blue Manufacturing
Account’s Receivable Confirmations
Requirement 2
What does it mean to “maintain control” over the confirmation requests and responses? What could go wrong if the auditor doesn’t maintain control over the confirmation process?
Requirement 5
Search the internet to identify a real-life situation where an auditor apparently did not maintain sufficient control over the confirmation process. Briefly describe the situation you found.

Requirement 4
What is the difference between a positive and a negative confirmation?
What are the advantages and disadvantages of each type?

Summary
Bud's Big Blue (BBB) Manufacturing is a company that makes flight instruments for small aircraft.
You are a staff auditor assigned to audit BBB after the previous staff auditor was reassigned to an out of town client.
Your first task is to do the last 7 A/R confirmations, of which either indicate a misstatement or have gotten no response.
Review auditing standards for confirmations and determine the best course of action for evaluating the remaining confirmations.
Requirement 1
List the four factors auditors should consider when evaluating the results of confirmation procedures. Also, what are three of the characteristics of a reliable confirmation?
Case 1 Satyam
The engagement team failed to maintain control over the process of sending the confirmation requests to the banks for, among other things, the confirmation of cash. Instead, members of the engagement team signed the confirmation requests, gave the requests to employees of Satyam, and relied on Satyam to send the confirmation requests to the banks.

Case 2 Happiness Express, Inc.
Happiness Express, Inc. designs, develops, manufactures and markets children's toys and housewares.
Sam Felean, Liang Xi, Di Qin
Case 1 Satyam
The engagement team also failed to maintain control over the cash confirmation response process. In 2005, 2006, 2007, and 2008, Satyam gave the engagement team what the Company represented to be confirmation responses received from six banks. After receiving the purported confirmation responses from the Company, the engagement team made no attempt to establish direct contact with the banks to confirm the accuracy of the amounts reflected on the confirmation responses, even though the vast majority of Satyam's reported cash was on deposit at these six banks.

Case 2 Happiness Express, Inc.
Its auditor Coopers & Lybrand mailed accounts receivable confirmations to selected customers of Happiness Express at the end of fiscal 1995. The auditors informed the CFO Michael Goldberg that one of its customers Wow Wee receivable was included in the accounts chosen for confirmation. Because Goldberg provided the auditors with an incorrect address for Wow Wee, the confirmation was never returned to Coopers & Lybrand. After the auditors discussed this matter with Goldberg, he offered to contact the appropriate individual at Wow Wee to ensure that the confirmation was returned. The auditors accepted Goldberg’s offer. Goldberg then forged a confirmation and had it faxed to Coopers & Lybrand. The auditors apparently accepted the confirmation without performing any follow-up procedures.


Difference
A positive confirmation is a communication addressed to the debtor requesting the recipient to confirm directly whether the balance as stated on the confirmation request is correct or incorrect.
Advantages of Positive Confirmations
A positive confirmation is more reliable evidence because the auditor can perform follow-up procedures if a response is not received from the debtor. With a negative confirmation, failure to reply must be regarded as a correct response, even though the debtor may have ignored the confirmation request.

Advantages of Negative Confirmations
Negative confirmations are less expensive to send than positive confirmations, and thus more can be distributed for the same total cost. Negative confirmations cost less because there are no second requests and no follow-up of non responses.
Which type of confirmation to use?
Auditing standards state that it is acceptable to use negative confirmations only when all of the following circumstances are present:
1. The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate evidence regarding the design and operating effectiveness of controls relevant to the assertion being tested by the confirmation procedure.
2. The population of items subject to negative confirmation procedures is made up of a large number of small, homogenous account balances, transactions, or other items.
3. The auditor expects a low exception rate.
The End
Thank You

As AU-C 505 indicates that when using external confirmation procedures, the auditor should maintain control over external confirmation requests, including
a. Determining the information to be confirmed or requested;
b. Selecting the appropriate confirming party;
c. Designing the confirmation requests, including determining that requests are properly directed to the appropriate confirming party and provide for being responded to directly to the auditor; and
d. Sending the requests, including follow-up requests, when applicable, to the confirming party.
If the auditor does not maintain the direct control, the client may manipulate the confirmation letter so as to make it consistent with its records.

Requirement 3
Complete the audit log for each of the seven confirmations. Consider whether each confirmation provides sufficient, appropriate audit evidence, whether sufficient alternative procedures have been performed for non-responses, and whether additional procedures should be performed before concluding that the confirmation provides evidence supporting the client's account balance. Be precise and concise as possible
A negative confirmation is also addressed to the debtor but requests a response

only when the debtor disagrees with the stated amount
.
The factors considered during the
confirmation process are listed in AU Section 330.
1. The reliability of confirmation procedures and other alternative procedures
2. The nature of any exceptions involving implication
3. The audit evidence given by other procedures
4. Whether further evidence is required
Three characteristics of a reliable confirmation
1. Positive or negative form
2. Sufficient knowledge by the third party
3. Third party is independent and free from bias
Full transcript