Chen, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Chen is satisfied that the accounts are correctly summarized and classified and that allocations, reclassifications, and valuations are made in accordance with GAAP. Chen is planning to use accounts receivable confirmation requests to obtain sufficient appropriate evidence as to trade accounts receivable.
Required:
a. Identify and describe the two primary forms of accounts receivable confirmation requests and indicate what factors Chen will consider in determining when to use each.
b. Describe how Chen may use a confirmation service provider to facilitate the process.
c. Assume that Chen has received a satisfactory response to the confirmation requests. Describe how Chen can evaluate collectibility of the trade accounts receivable.
d. What are the implications to a CPA if, during an audit of accounts receivable, some of a client’s trade customers do not respond to a request for positive confirmation of their accounts?
e. What auditing steps should a CPA perform if there is no response to a second request for a positive confirmation?
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