Accounts receivable confirmation is a technique used in auditing to verify a company’s records by sending communications directly to clients. There are two types of confirmation: positive and negative. The process involves writing a letter to clients, compiling information, and using it in a final audit report. The selection process can be a mix of carefully chosen and random targets. The use of accounts receivable confirmation can provide valuable audit evidence, but it has its flaws.
Accounts receivable confirmation is a technique used in the audit process to verify a company’s records. The auditor sends communications directly to clients, asking them to confirm the records maintained by the company. This allows auditors to check for errors, which can range from deliberate falsifications to poor record keeping. Such evidence can be especially valuable because it comes from a third party outside the company who has no vested interest in the audit outcome, and can therefore, in theory, be trusted to provide the correct information.
There are two types of accounts receivable confirmation. In a positive request, the auditor asks the client to respond, confirming the accuracy of the information or correcting it if it is wrong. Negative requests indicate that clients should only respond if there is an error; the auditor assumes that the information is correct if a response never arrives. One flaw with this approach is that clients may be reluctant to write auditors, in which case the absence of evidence may not mean that the company’s records are accurate.
This process consists of writing a letter with information about the audit and the data that the company keeps on file. The company provides the names and addresses of the customers, and the auditor sends the accounts receivable confirmation paperwork. Clients are asked to report directly to the auditor, not the company, so the paperwork never passes through the hands of people who may have a conflict of interest. Auditors compile the information, compare it to records, and use it in a final audit report to express an opinion on the condition of the company’s books.
The selection process for which clients must obtain an accounts receivable confirmation can be a mix of carefully chosen and random targets. Very large outstanding and overdue accounts may be examined more closely because they are of special interest. Auditors can also randomly choose between smaller and current accounts to get a bigger picture of the company’s finances.
The use of an accounts receivable confirmation can provide a great deal of valuable audit evidence. It’s not without its flaws, however, as customers may refuse to respond to a request or the business may have incorrect contact information, meaning requests never reach them. Auditors may have to spend considerable time researching and tracing specific clients to collect data, which can increase the cost of the audit.
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