If external confirmations cannot be obtained for contractor payables or receivables, which approach should be followed?

• A. Obtain confirmations from a subset of counterparties.
• B. Rely on other client-approved documents only.
• C. Use alternative procedures to obtain sufficient appropriate evidence (e.g., tracing to subsequent cash receipts, performing cut-off testing, recalculations, etc.).
• D. Record the balances as misstated.

Answer: (C)

When external confirmations aren’t obtainable for contractor payables or receivables, you shift to gathering evidence through alternative procedures that can still support the audit conclusions about existence, accuracy, and valuation. The goal is to obtain sufficient appropriate evidence even in the absence of confirmations.

You can trace from the balances in the ledgers to supporting documents and vice versa, and perform related testing. For receivables, tracing post-year cash receipts back to recorded sales helps confirm that the recorded amounts are collectible and were not overstated. For payables, examining post-period payments and reconciling balances to supplier statements or invoices helps verify that liabilities exist and were properly recorded and settled. In addition, conducting cut-off testing around the period end ensures that transactions are recorded in the correct period, and recalculations or analytical procedures help validate the accuracy and classification of those balances. Reviewing subsequent payments or receipts, and evaluating the aging and collectibility of receivables or the accuracy of payables, further strengthens the evidence when confirmations are not available.

This approach provides evidence aligned with the audit assertions without relying on third-party confirmations. If the alternative procedures still leave insufficient evidence, the auditor would need to consider the resulting scope limitation and potential impact on the opinion.