a.) ‘Positive’
confirmations and ‘Negative’ confirmation are the two types of confirmation
used for accounts receivable. A positive confirmation is a communication
addressed to the debtor requesting him/her to confirm whether the balance as
stated in the confirmation is correct or not.
A negative
confirmation is one where a
response is requested from the debtor, if the balance stated in the
confirmation is incorrect.
Positive confirmations are used in case of debtors where large
amounts are due and the number of accounts is low. Positive confirmations are
also used when there is evidence or suspicion of fraud or serious error. When
regulatory authorities require balances, the positive
balance confirmations are
used. Negative confirmations are used when the number of ‘Accounts Receivable’
accounts is large and individual balances are small.
(b.) For evaluating the
collectibility of the Accounts
Receivable, the auditors would look into the ageing of the Accounts
Receivable and discuss collectibility of individual accounts with the personnel
of the clients. They may also examine the correspondence with the important
customers and also the financial statements of these customers.
(c.) When the public accountant
comes across an instance where a debtor fails to respond to positive
confirmation, the accountant cannot presume that the debtor checked the request
and did not respond because there is no error. There may be some busy customers
who do not find enough time to check their confirmations. But there may be
cases also, where frauds or embezzlements might have taken place. The Public
Accountant may desire that such accounts may further be pursued with second
positive confirmations.
(d.) When no response is
received for second positive confirmation, the auditors resort to alternative
procedures for verification. They examine the customer’s formal remittance
advice and cash receipts journals. Correspondence in client’s files can also be
checked to for satisfactory evidence. Verification of shipping documents, sales
invoices contracts and other instruments are also useful. In certain unusual
cases, the auditor can telephone the client and have a discussion with him
directly. In cases where substantial amounts are involved, the public auditor
may go to the extent of investigating the existence of customer or his
financial status.
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