The most effective way of confirming debtor balances is by the auditor communicating directly with the customers of the client to seek direct confirmation of the amounts outstanding.
Circularization satisfies the following objectives: –
- Strong evidence whether debtors are overstated – Customers can usually be relied upon to complain if the balance they are supposed to owe is overstated (i.e. completeness and accuracy). However, it is a weaker source of evidence on whether debtors are understated – customers are less likely to kiliicomplain if the balance is too small.
- Evidence of the functioning of controls i.e. if the ICS over debtors is strong, there will be few discrepancies regarding what is stated by the debtors and what is stated in the clients records
- Evidence of the efficiency of cut-off procedures if carried out at year-end.
- Evidence regarding irregularities such as ―teeming and lading‖ and window dressing.
- Provides reliable evidence on existence of debtors.