Question

Discuss the audit procedures relating to Receivable Circularization in the situations listed below:
a. When balance agreed by the customer.
b. When balance not agreed by the customer.
c. When customer is unable to confirm the balance because of the form of records kept by the customer.
d. When customer does not reply to the confirmation letter.

Answer 1

iThe iauditor idoes iso iwith ian iaccounts ireceivable iconfirmation. iThis iis ia iletter isigned iby ia icompany iofficer i(but imailed iby ithe iauditor) ito icustomers iselected iby ithe iauditors ifrom ithe icompany's iaccounts ireceivable iaging ireport. iThe iletter irequests ithat icustomers icontact ithe iauditors idirectly iwith ithe itotal iamount iof iaccounts ireceivable ifrom ithe icompany ithat iwas ion itheir ibooks ias iof ithe idate ispecified iin ithe iconfirmation iletter. iThe iauditor itypically iselects icustomers ifor iconfirmation ithat ihave ilarge ioutstanding ireceivable ibalances, iwith isecondary iconsideration igiven ito ioverdue ireceivables, ifollowed iby ia irandom iselection iof icustomers ihaving ismaller ireceivable ibalances.

There iare itwo iforms iof iconfirmation, iwhich iare:

· Positive iconfirmation. iThis iis ia irequest ito iprovide ia iresponse ito ithe iauditor, iwhether ior inot ithe icustomer iagrees iwith ithe ireceivable iinformation ilisted iin ithe iconfirmation.

· Negative iconfirmation. iThis iis ia irequest ito icontact ithe iauditor ionly iif ithe icustomer ihas ian iissue iwith ithe iaccounts ireceivable iinformation icontained iwithin ithe iconfirmation. iThis iis ia iless irobust iform iof ievidence, isince ithere iis ian iinclination iby icustomers ito inot icontact ithe iauditor, iwhich ileads ito ithe ipresumption iby ithe iauditor ithat icustomers iagree iwith ithe ipresented iaccounts ireceivable iinformation.

If icustomers ido inot ireturn iconfirmations ito ithe iauditor, ithe iauditor imay igo ito iconsiderable ilengths ito iobtain ithe iconfirmations, igiven ithe ihigh iquality iof ithis iform iof ievidence. iIf ithere iis ino iway ito iobtain ia iconfirmation, ithen ithe iauditor's inext istep iis ito iinvestigate isubsequent icash ireceipts, ito isee iif icustomers ihave ipaid ifor ithose iinvoices ithat iwere inot iconfirmed. iThis iis ia istrong isecondary iform iof ievidence ithat ithe iaccounts ireceivable ioutstanding iat ithe iend iof ithe ireporting iperiod ibeing iaudited iwere iin iexistence iat ithat itime.

When ibalance iagreed iby ithe icustomer.( iPositive iconfirmation)

Positive iconfirmation iis ian iauditing iinquiry ithat irequires ithe icustomer ito irespond, iconfirming ithe iaccuracy iof ian iitem. iPositive iconfirmation irequires iproof iof iaccuracy iby iaffirming ithat ithe ioriginal iinformation iwas icorrect ior iby iproviding ithe icorrect iinformation iif iincorrect.

· Positive iconfirmation irequires iproof iof iaccuracy iby iaffirming ithat ithe ioriginal iinformation iwas icorrect ior iby iproviding ithe icorrect iinformation iif iincorrect.

Positive iconfirmation iis ipart iof ithe iconfirmation iprocedures ithat iauditors iuse ito iconfirm ispecific ipieces iof iinformation. Some iexamples iof ithe iinformation irequired ifrom iauditors iinclude iconfirming ithe ifollowing:

· The iamounts iand idescriptions iof ivarious itypes iof iliabilities

· Bank iaccount iinformation iincluding ibalances

· Inventory iamounts iand itypes

· Investments ior isecurities

· Copies iof isales iinvoices ito iensure isales iwere imade

· Information ior icopies iof ishipping iinvoices ito iensure iproducts iwere ishipped

If ian iindividual ior ibusiness ientity iis iselected ifor ian iaudit iby ithe iInternal iRevenue iService i(IRS), ithe itaxpayer imust iproduce irecords ito iaffirm ithe iinformation ilisted ion ithe iselected itax ireturns. iEven iif ithe iinformation irequired ifor ithe iaudit imatches iwhat iwas ireported, iall ievidence imust ibe isubmitted ito isatisfy ithe iaudit irequirements.

Negative iConfirmation

Negative iconfirmation iis ia iletter ior idocument irequesting ithat ithe irecipient ishould ionly irespond ito ithe isender iif ithere iwere ian iissue iwith ithe icontents iof ithe imessage ior ithe irecipient iwanted ito iopt iout iof ithe ievent ithe iletter ihad iaddressed.

Negative iconfirmation iletters ican ibe iused iin imany itypes iof ibusiness isituations iand iare ioften iused iin ithe ifinancial iservices iindustry. iThe ipurpose iof ithe icommunication iis ito ireduce ithe inumber iof iincoming iresponses ian iorganization ireceives iin ireply ito ia iletter isent ito iits iclient ibase. iIn ia inegative iconfirmation ior inegative iconsent icommunication isituation, ithe icompany ior ientity isending ithe imessage ionly ireceives iresponses ifrom i"no" ivotes, ias iopposed ito iresponses ifrom ieverybody iregardless iof itheir iopinion.

iNegative iconfirmation iis itypically iused iwhen ithe iaccounting icontrols iof ia icompany ihave ihistorically ihad ivery ifew ierrors iand iare ithus iconsidered ito ibe istrong. iThe icompany iis iasked ito idouble-check ithe inumbers iand ionly iconfirm iif ithere iis ia idiscrepancy.

Employee iRetirement iPlans

iWith iauto-escalation, ithe ipercentage iof ian iemployee's ipaycheck icontributed ieach ipay iperiod iis iautomatically iincreased ievery iyear.

The iintent iof ithis iautomatically iincreasing isavings irate iis ito ihelp ipeople isave imore imoney ifor iretirement.

Confirmation iAnalysis

Auditors ialso iuse ipositive iconfirmation iletters ito iverify iaccounts ipayable iand iaccounts ireceivable ior icompanies. Accounts ireceivables irepresent imoney iowed iby ia icompany's icustomers ifor ithe isale iof igoods. iReceivables iand ipayables itypically ihave ipayment iterms iof i30, i60, ior i90 idays—meaning ia ipayment ineeds ito ibe imade iwithin ithat itime iframe.

Accounts ireceivables iare ishort-term iassets iand ican ibe iused iby icompanies ias icollateral ito iobtain iloans ior ifinancing ifrom ibanks. iAs ia iresult, iit's iimportant ithat ithe ireceivables iare iaudited ito iconfirm ithat ithe isales iwere imade ias iwell ias iconfirm ithat ithe ifunds ifrom ithe isales iare ibeing icollected ion itime.

If ia icompany iwishes ito iaudit iits iaccounts ipayable irecords, iit imust ireview iany ioutgoing ifunds iassociated iwith idebt iobligations ior icreditor ipayments. iAdditionally, ithe ibusiness imay ichoose ito imatch ithe iaforementioned iamounts ito iactual iwithdrawals ifrom ipayment iaccounts ito iconfirm iaccuracy.

USEFULNESS iOF iCONFIRMATIONS

The iusefulness iof ian iaudit iprocedure ishould ibe iassessed iby iits irelative ieffectiveness iand iefficiency iin iachieving iaudit iobjectives.

Effectiveness io if iConfirm iations

iProfessional istandards irecognize ithat ithe icompetency iof ievidence idepends ion iits ivalidity iand irelevancy. iConfirmations iare irelevant ibecause ithey irequest iindependent iverification iof iinformation iabout iaccounts ireceivable ibalances ior itransactions, iand isuch iverification iis iimportant ifor ithe icompletion iof ithe iaudit. iValidity iis ibased ion ithe ifollowing igeneral ipresumptions:

1. iWhen ievidential imatter ican ibe iobtained ifrom iindependent isources ioutside ian ientity, iit iprovides igreater iassurance iof ireliability ifor ithe ipurposes iof ian iindependent iaudit ithan ithat isecured isolely iwithin ithe ientity.

2. iThere iis imore iassurance iabout ithe ireliability iof iaccounting idata iand ifinancial istatements iwhen ithey iare ideveloped iunder isatisfactory iconditions iof iinternal icontrol ithan iwhen ithey iare ideveloped iunder iunsatisfactory iconditions.

3. iThe iindependent iauditor’s idirect ipersonal iknowledge, iobtained ithrough iphysical iexamination, iobservation, icomputation, iand iinspection, iis imore ipersuasive ithan iinformation iobtained iindirectly.