ACCA Audit and Assurance (F8) Practice Exam

Under which circumstances is positive confirmation most likely to be applied?

1. Weak internal control

2. Presence of multiple disputes

3. Indication of suspected fraud

4. Existence of large account balances

The correct answer is: Weak internal control

Positive confirmation is most likely to be applied in situations where there are large account balances. This is because positive confirmations require the recipient (usually a debtor or customer) to reply directly to the auditor or the entity requesting confirmation of specific amounts. When the balances are substantial, the auditor is more interested in ensuring the accuracy and existence of these amounts, making positive confirmation an effective tool. In instances where large balances are involved, the risk of material misstatement increases, and auditors seek to obtain direct evidence from third parties. Positive confirmations provide a stronger form of evidence than negative confirmations, as they verify the actual amount reported by the entity, helping to assure the auditor about the reliability of the financial statements. Other scenarios may not warrant the same reliance on positive confirmations; for example, weak internal controls might suggest a need for increased testing, but does not specifically lead to the preference for positive confirmations. Multiple disputes could indicate disagreements that may complicate obtaining confirmations, while suspected fraud typically requires more investigative procedures rather than just confirmation of balances.