Confirmation Procedure of Account Receivable Essay

Steps In Confirmation Process The steps in the process of confirming receivables follow: Step-1. Obtain Aged Schedule of Accounts Receivable The auditor should obtain an aged schedule of accounts receivable as of the confirmation date. He or she should apply the following procedures to this schedule: Determine that totals are correct. Compare all or a selected sample of account balances with the account balances in the accounts receivable subsidiary ledger. Investigate credit balances. Step-2. Select Accounts for Confirmation

Auditors have used, and some continue to use, judgment in selecting accounts for confirmation. Statistical sampling methods, however, are ideal for the selection process. Whatever method of selection is used, the auditor generally considers the following accounts: [1]. All accounts with a balance over a predetermined amount. The predetermined amount is based on the auditor’s assessment of materiality. [2]. Some or all accounts with zero balances. [3]. Accounts with old unpaid items, especially when subsequent sales have been paid. [4].

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Accounts written off during the year under review. [5]. Accounts with entities related to the client but not audited by the auditor. [6]. Certain accounts that appeared on the prior year’s accounts receivable schedule but not on the current year’s. [7]. Accounts with credit balances: Occasionally, the client will not want confirmation requests sent to these accounts. If the amounts are material, it might result in a scope limitation; however, this is generally not the case. If accounts with credit balances are not confirmed, alternative auditing procedures should be applied. 8]. Of the remaining accounts, a representative portion both in dollar amount and number of accounts should be selected. Step-3. Prepare and Mail Confirmation Requests The auditor should observe the following procedures in preparing and mailing confirmation requests: [1]. Prepare schedule of accounts to be confirmed. Alphabetically. Address. Amount. Assign each account a number. This number also should be placed on the confirmation request. Total the dollar amount of receivables selected for confirmation and compute as a percentage of the total dollar amount of the receivables.

Determine the number of confirmation requests and compute as a percentage of the total number of accounts. Leave sufficient blank columns after the customer’s name to insert the following information when the confirmation reply is received: (1) Date reply received; (2) Amount confirmed; and (3) Explanation of difference between amount customer confirmed and client amount. Leave a blank column for insertion of the date the second request was mailed. Indicate at bottom the date the first requests were mailed. [2]. Request that client address confirmation forms and prepare customer statements.

If auditor desires that client not know which accounts are to be confirmed, he or she should have his or her staff address confirmations. If auditor desires that client not know which accounts are to be confirmed but wants client to address confirmations, he or she should request client to address confirmation to all accounts and then eliminate the accounts not selected for confirmation. [3]. When the auditor receives the addressed confirmation with the account balance and the customer statement, he or she should compare that balance with the balance on the schedule. [4].

Independently, some customer addresses should be checked. These tests can be made by comparing the address on confirmation with the address in the telephone book. [5]. After confirmations have been reviewed and numbered, the auditor should insert them and the customer statement in his or her firm’s envelopes, that is, envelopes with the firm’s return address. [6]. In addition to inserting the confirmation request in the envelope, insert a postagepaid return envelope bearing the auditor’s address. [7]. When the requests have been stamped, the auditor should mail them.

From the time the auditor receives the addressed confirmation requests containing the account balances, he or she should never lose control. The confirmation requests always should remain in the auditor’s custody or under his or her supervision until mailed. Step-4. Process Responses to Confirmation Requests When confirmation replies are received, the auditor should do the following: [1]. Enter for each account the following: Date received. Amount confirmed. [2]. If the amount confirmed differs from the account balance, the following should be done: Photocopy confirmation reply.

Give photocopy to client and request that the difference be reconciled and provide documentation for reconciling items. Review documentation for reconciling items. If documentation is satisfactory, enter reasons for difference in receivable confirmation schedule. [3]. If the amount confirmed differs from the account balance and the client cannot satisfactorily reconcile the difference, the auditor should do the following: If the difference is small, the auditor may ignore it. If there are a significant number of small differences, however, the auditor should analyze them.

If the analysis of the significant number of small differences indicates a deficiency in the receivable controls, the auditor may have to apply additional auditing procedures to satisfy himself or herself of the accounts receivable balance. If the difference is significant, request the client to correspond with the debtor. Make certain the correspondence states that the debtor response should be sent directly to the auditor. A CPA firm needs to establish a mechanism for ensuring that responses mailed to the CPA firm are obtained and considered by the audit team in the field on a timely basis.

Also, a firm needs to ensure that responses that relate to transaction terms and other complex matters (such as compliance with laws and regulations for a governmental entity) are considered by appropriately experienced audit team members. Step-5. Summarize Confirmation Results Near the conclusion of the engagement, the auditor should prepare a worksheet summarizing confirmation results. The worksheet should contain the following: [1]. Number and dollar amount of confirmations sent and the percentage of these to the total receivables. [2].

Number and dollar amount of confirmations received with no exceptions indicated and the percentage of these to the total confirmations requests. [3]. Number and dollar amount of confirmations received with exceptions that were satisfactorily reconciled by the client. Compute the percentage of these to the total confirmations requested. [4]. Number and dollar amount of confirmations received with exceptions that were not satisfactorily reconciled by the client. Determine total dollar amount of differences between client records and confirmation responses. Determine reasons for differences and materiality of differences.

Compute the percentage of these to the total confirmations requested. [5]. Review statistics and determine if the results of the confirmation procedures provided sufficient competent evidential matter as to the existence of the receivables. If the auditor is not satisfied with the results of the confirmation procedures, he or she should perform other procedures such as the following: Review subsequent cash receipts and accompanying remittance advices. Review individual sales invoices and related shipping documents p. 444 By confirming an AR, the auditors prove that the AR and customers exist.

Written acknowledgement of the debt by the debtor serves the purpose of (a) establishing the existence and gross valuation of the assets, and (b) providing some assurance that no lapping or other manipulation affecting AR is being carried on at the balance sheet date. The confirmation of AR provides only limited evidence about the compleness and valuation assertions because only recorded amounts are confirmed, and debtors may acknowledge debts even though they are not able to pay them. Confirm accounts payable by direct correspondence with vendor Confirm receivables with debtors.

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