ACCA Audit and Assurance (F8) Practice Exam

When is negative confirmation most commonly applied in an audit?

1. When RoMM is high and internal control is weak

2. When RoMM is low and internal control system is strong

3. When the auditor has limited information on the client

4. When there are numerous disputes in account balances

The correct answer is: When RoMM is low and internal control system is strong

Negative confirmation is most commonly applied in situations where the risk of material misstatement (RoMM) is low and the internal control system is strong. This approach is effective because, in cases where RoMM is assessed as low, the auditor can rely on the strong internal controls to support their assessment. Negative confirmations involve sending requests to third parties for verification of account balances, where a response is only required if the information provided is inaccurate. Because the likelihood of misstatements is low, the auditor does not need a high level of assurance, which makes negative confirmation a cost-effective and time-efficient method to confirm balances. Furthermore, strong internal controls mean that the organization has established mechanisms that are likely preventing errors or fraud, providing the auditor with additional assurance that the balances being confirmed are accurate. In these contexts, negative confirmation can be a practical option because the auditor can reasonably expect that recipients will respond if there is an error, given the strong control environment.