Reference no: EM132450713

Response a:

• Substantive tests of transactions are designed to verify the dollar value of transactions, while substantive tests of balances are tests that substantiate the ending balance of a general ledger account. A situation when a substantive test of balances can occur is when an auditor is testing accounts receivable balances. The auditor will verify that the balance in the general ledger agrees with the individual accounts receivable balances through confirmation possible using one of the examples of positive or negative confirmation above. Another example of when auditors may perform substantives tests of balances is when confirming inventory balances at the end of the year and associated accounts receivable balances.

Response b:

• Confirmations are type of audit evidence used to determine tests of details for accounts receivable balances. In general, "a confirmation is a direct written response from a third party in paper or electronic form" (Arens, et al., 2017, p. 537). With positive confirmation, a letter is sent to the debtor requesting a response if the stated account balance is correct or not. A negative confirmation, on the other hand, requests a response only if the recipient disagrees with the amount of the stated account balance. With a positive confirmation, the follow-up may be needed until the recipient responds, hence making it more reliable source of evidence. With a negative confirmation, no response is considered to be a correct response even though the recipient ignored the letter or simply did not respond. However, a negative confirmation is less expensive due to the simple process, and therefore, it can be sent to more recipients for the same cost (Arens, et al., 2017). I believe email confirmations are acceptable considering the ease and speed of communication. The mail can get misplaced, but email will not. Email can also be used as a physical evidence since it can be saved on the computer and printed whenever it's needed. The oral confirmation may increase a response rate, but I think it is acceptable only if the conversation is being recorded.