What’s Account Receivables Confirmation?

Overview:

Auditors normally perform account receivables confirmation to confirm accounts receivables recorded in the client’s financial statements. This confirmation also seeks to confirm the accuracy and existence of the accounts balance that is outstanding at the reporting date.

Normally, the account receivables report in the financial statements is considered a significant and sensitive area by auditors.

And the most important assertions that need to confirm by auditors for account receivables are existence, valuation, recoverability, as well as completeness.

To confirm the existence, auditors might have many procedures. For example, review the outstanding receivables to invoices, and review the subsequent collection.

However, for the sensitive account, auditors also performed the confirmation from customers. Because, when auditors review the invoices and subsequent collection, all the information, and documents that auditors have been obtained from the client-side only.

The better evidence to support those outstanding and their correctness is obtained from the third party, like customer confirmation.

Auditors perform two types of confirmation—positive and negative proof. The most popular one is positive confirmation.

Positive company confirmation is required customers to respond no matter whether the confirming information is correct or not. But the negative confirmation is required only if the confirming information is incorrect.

How is Account Receivables Confirmation performed?

During the audit, the auditor will assess which accounts of the company’s financial statements are significant and considered as high risks of material misstatements in the financial statements.

In the income statement, revenues, cost of goods sold, and operating expenses are the account that auditors normally considers as significant account,s and then they will perform testing on those accounts.

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In the balance sheet, for the normal company, cash in the bank, account receivable, fixed assets, and account payable are the accounts that are normally considered significant.

Certain procedures are performed to get comfortable before making the conclusion on the audit option.

One of the important procedures used by the auditor is confirmation. For account receivable confirmation, auditors normally use the audit tools to help them quantify the sample and select the sample items.

Once the auditor confirms how many accounts need to be confirmed and which accounts are selected, the auditor will draft the account receivable confirmation based on the template used by the audit firm and the methods they use.

Negative or positive.

Sometimes, the auditor will just provide the list of customers they are selected and the template they are using to its client for completion.

Once the template is completed, auditors review the correctness of the information and then get the confirmation signed off by the company’s authorized person.

Send and receive the confirmation:

Once the confirmation is ready to be sent, the auditor is the one who sends the confirmation to the client’s customers.

The confirmation should not send by the client to its customer. This is to confirm that evidence that is collected from the confirmation is considered third-party information.

The auditor is also the one who receives the confirmation from the client’s customers. If in case, the confirmations are sent and received by clients, the auditor will have to perform the confirmation of that customer again. The auditor might need to consider if additional samples are required.

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