You are the audit manager in a firm of chartered accountants and are currently faced with the following situations at two different clients.
(i) A bank confirmation has not been received despite extensive follow up by the client. As the deadline is close, the client has provided you the original bank statement of 31 December 2016 duly stamped and signed by the Bank Manager. Consequently, the client is of the opinion that confirmation is no more necessary.
(ii) At the planning stage of audit of Orange Limited, the management has refused to send confirmations to three major debtors who constitute 45% of the total debtors. On inquiry, you have been informed that these debtors are partnership concerns and take lot of time in replying to confirmation requests. However, as an alternative the management has offered to send negative confirmation requests.
Discuss how you would deal with the above situations. Also state the possible implications on the audit report.
- Bank confirmation contains details such as facilities, securities, additional banking relationships, trade finance, derivative and commodity trading and custodian arrangements. These information are not available in bank statement. Moreover, the bank confirmation is supposed to be received directly from the bank whereas the bank statement has been received through the client.
- We need to determine whether a response to a positive confirmation is necessary to obtain sufficient appropriate audit evidence related to bank balance as at December 31, 2013.
- If it is concluded that the response to bank confirmation is not necessary then we would perform alternate audit procedures to obtain sufficient appropriate audit evidence relating to details not provided by the bank.
- If we are unable to obtain sufficient appropriate audit evidence from alternative audit procedures or if we conclude that the response to the bank confirmation is necessary and we are unable to obtain bank confirmation, then it will constitute a scope limitation. Accordingly, we would qualify the audit report or issue a disclaimer of opinion depending on the materiality and pervasiveness of the matter.
Bank Confirmation Process
- The request by management for sending negative confirmation requests is not appropriate as these are usually sent when population comprises of large number of small account balances.
- The reason provided by the management for not sending confirmation request to three debtors is not appropriate.
- In view of the above, we would ask the client to send positive confirmation request.
- If the client refuses to send positive confirmation, we would evaluate the implications of the refusal on the risk of material misstatement, including the risk of fraud and on the nature timing and extent of other audit procedures.
- Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
- If we are unable to obtain sufficient appropriate audit evidence form alternative audit procedures or if we conclude that the confirmation is necessary and we are unable to obtain confirmation from the debtors, then it will constitute scope limitation. Based on the materiality and pervasiveness of the matter, we would issue a qualified or disclaimer of opinion as appropriate.
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