Direct confirmation of receivables
Evidence
(i) Auditors often seek direct confirmation of receivables to ensure that the amounts stated in the entity‘s accounts receivable ledger are not overstated. Confirmation also provides evidence in relation to certain frauds and the quality of internal controls.
(ii) Confirmation that an amount is owed is not confirmation that the amount will be paid and auditors need additional evidence on the recoverability of receivables.
(iii) There are two types of confirmation, positive and negative. In the former case, the customer is requested to reply in any case, and the auditor can either insert the balance to be confirmed or the customer can be requested to do so. In the latter case, a reply is only requested if the customer disagrees. This method is only suitable where receivables are well controlled.
Practical difficulties
(iv) The response rate to requests for confirmations is not always satisfactory and repeated requests may be necessary. It is not uncommon for replies to be inaccurate, especially where the amount stated is too low.
(v) Where the customer is requested to insert the balance, the reconciliation can sometimes be very difficult, even with the help of the client, and the customer‘s assistance may be needed.
Alternative evidence
(vi) Where no reply is received it is important that alternative evidence is obtained on the same balance (and not to test another balance). Where there is a discrepancy between the client‘s records and the customer‘s records, the matter should be investigated and resolved.
(vii) Sometimes, the customer can provide a reconciliation, particularly if the matter only relates to timing differences. On other occasions there may be a dispute and a provision may be necessary.
(viii) Alternative evidence for receivables includes payment of the amount after the period- end, a review of contracts and signed delivery notes, and analytical procedures on the ageing of receivables.
