Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Under what circumstance is an auditor required to confirm accounts receivable?

1. When accounts receivable balances are high

2. When balances are newer than the previous year

3. When balances are material to the financial statements

4. When smaller than expected

The correct answer is: When balances are material to the financial statements

An auditor is required to confirm accounts receivable primarily when those balances are material to the financial statements. Materiality in auditing refers to the significance of transactions, balances, or disclosures in the financial statements that could influence the economic decisions of users taken on the basis of those financial statements. When accounts receivable are material, it indicates they represent a substantial amount and could impact the overall financial statements if misreported. As part of the auditor's responsibility to provide reasonable assurance that the financial statements are free from material misstatement, confirming accounts receivable helps verify the existence and accuracy of those balances through direct communication with the customers. While high balances, newer accounts, or balances that are smaller than expected may warrant additional scrutiny, they do not automatically trigger a requirement for confirmation. The materiality of the balances is the key factor that dictates the need for this specific audit procedure. In fact, if the receivables are not material, the auditor may decide to perform alternative procedures to obtain sufficient audit evidence rather than requiring confirmations.