[professionalskeptic]

I came across a question today on Ninja which basically said that confirmation is not required for accounts receivable balance if the balance is immaterial.

I was under the impression that substantive tests are required for all account balances regardless of materiality. Is that right? What other exceptions are there if any?

FAR - 11/18/15 - 74, 04/29 - 70 overworked myself to the last day and was burnt out at the exam.
AUD - 01/18/16 - 74 AGAIN FML, retake - only going to schedule when I feel happy with my prep.

[Anonymous]

I can't think of any other exceptions, although they may exist.

If you think of an audit in terms of its ultimate purpose – to express an opinion on the financial statements, and that the opinion is based on being free from material misstatement – it makes sense that the auditor doesn't care about anything that is immaterial. In fact, in most cases, to spend time investigating immaterial balances would be inefficient & wasteful. (Unless we are talking about a risk of understatement.) So you just won't even bother testing those areas. (It's called scoping out.)

[jpowell31]

See this explanation for that particular “exception”:
For both AICPA and PCAOB auditing standards, confirmation is presumptively required unless accounts receivable are immaterial, use of confirmations would be ineffective, or the combined assessed level of inherent and control risk is low. ISAs do not require confirmation. However, in making a determination on whether to confirm, the auditor considers the assessed risk of material misstatement at the assertion level and how the audit evidence from other audit procedures will reduce the risk of misstatement at the assertion level to a low level.

I can't really think of any others right now but they may exist…I'd agree with @bet10..it wouldn't be efficient to test every immaterial account balance. In terms of confirmations, think about a company who has thousands of receivable balances from customers. You probably wouldn't send confirmations to customers who only owe a couple hundred dollars if your typical receivable balance is in the thousands, tens of thousands or higher.

[professionalskeptic]

Thanks for the replies!

So, to sum it up does this “exception” apply to every immaterial account balance or does it relate only to receivables?

Also, can this also be interpreted to say that no substantive testing is required for any immaterial account balance
or does it apply only to confirmation procedures?

FAR - 11/18/15 - 74, 04/29 - 70 overworked myself to the last day and was burnt out at the exam.
AUD - 01/18/16 - 74 AGAIN FML, retake - only going to schedule when I feel happy with my prep.

[Anonymous]

@professionalskeptic – you do not need to perform any substantive tests on any immaterial balances unless there is a danger of understatement. So, not just receivables, not just confirmations.

[TheHoundThatRides]

@professionalskeptic

If each customer owes a company $400, they might be small enough to be immaterial individual account receivables. But if all the customer balances add up to $80,000, that might be a material amount and you would have to do substantive testing even though each receivable is immaterial.

That might be important to keep in mind.

BEC - 78 (August 2015)
FAR - 80 (November 2015)
AUD - 73, 67. (Ok I gotta confess I was even more lazy this time around)
REG - August 27th, 2016

[professionalskeptic]

thanks both of you that helps clear up a basic but major doubt!

FAR - 11/18/15 - 74, 04/29 - 70 overworked myself to the last day and was burnt out at the exam.
AUD - 01/18/16 - 74 AGAIN FML, retake - only going to schedule when I feel happy with my prep.

[Author]

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