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Here are the conditions that must exist before auditors decide to use negative confirmation:
Low Risk of Material Misstatement: The auditors must assess that the risk of material misstatement in the account being confirmed is low. This means they believe the account balance is likely to be accurate and that there's a low likelihood of fraud or errors.
Large Number of Small Balances: Negative confirmations are often used when there's a large number of accounts with relatively small balances. This is because it's more efficient and cost-effective to send out a large number of negative confirmations than to individually confirm each account with a positive confirmation.
Reliable Internal Controls: The auditors must have confidence in the client's internal controls over the account being confirmed. This means they believe the client has effective controls in place to prevent and detect errors or fraud in the account.
Sophisticated Clients: Negative confirmations are often used with clients who have a good understanding of accounting and auditing procedures. This is because these clients are more likely to understand and respond appropriately to negative confirmation requests.
Low Expected Response Rate: The auditors must anticipate a low response rate to the negative confirmations. This is because recipients are often less likely to respond to negative confirmations than to positive confirmations.
No History of Disputes: The client should not have a history of disputes with its customers or vendors over account balances. This suggests a higher likelihood of disagreements or non-responses to negative confirmations.
Additional Considerations: