X hits on this document

Word document

Chapter 16 - Completing the Tests in the Sales and Collection Cycle: - page 5 / 5





5 / 5

16-28a.The two types of confirmations used for confirming accounts receivable are "positive" and "negative" confirmations. A positive confirmation is a letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount. A negative confirmation requests a response from the debtor only when the debtor disagrees with the stated amount.

When deciding which type of confirmation to use, the auditor should consider the assessed control risk in the sales and collection cycle, the make-up of the population, cost/benefit relationship, and any information about the existence of the accounts. Positive confirmations are more reliable but more expensive than negatives confirmations. Positive confirmations should be used when the population is comprised of a small number of large accounts, and when there are suspected conditions of dispute or inaccuracy. When negative confirmations are used, the auditor has normally assessed control risk below maximum and tested the internal controls for effectiveness. Negative confirmations are often used when accounts receivable are comprised of a large number of small accounts receivable from the general public.

b.When evaluating the collectibility of accounts receivable, the auditor may review the aging of accounts receivable, analyze subsequent cash receipts from customers, discuss the collectibility of individual accounts with client personnel, and examine correspondence and financial statements of significant customers. Changes in the aging of receivables should be analyzed in view of any changes in the client's credit policy and in the current economic conditions.

c.When customers fail to respond to positive confirmation requests, the CPA may not assume with confidence that these customers checked the request, found no disagreement, and therefore did not reply. Some busy customers will not take the time to check confirmation requests and will not respond, hence obvious exceptions may exist without being reported to the CPA. In the case of fraud or embezzlement, the perpetrators could perhaps prevent exceptions from being reported and prevent letters addressed to nonexistent customers from being returned from the post office as undeliverable. Confirmations returned as undeliverable by the post office will require appropriate action to obtain better addresses.  Follow-up is necessary when customers do not reply because the CPA has selected the positive confirmation route for certain receivables, and the most logical step to follow first is to mail second requests.

d.When no response is received to the second request for positive confirmation, the auditor should use alternative procedures. These normally include examination of the customer's remittance advice and related cash receipt. This is often a simple and effective check where cash receipts were received subsequent to the balance sheet date. Correspondence in the client's files will also sometimes offer satisfactory evidence. The auditor should also examine shipping documents, sales invoices, contracts, or other documents to substantiate that the charges were proper.  In unusual cases, the CPA should mail a third request and possibly make telephone calls in an effort to get a reply directly from the customer. The CPA may find it necessary, where significant amounts are involved and circumstances are not clear, to investigate the existence and/or financial status of a customer.

Document info
Document views14
Page views14
Page last viewedFri Oct 21 20:36:39 UTC 2016