Accounts receivable confirmation is a technique used in the auditing process to verify a company’s records. The auditor sends communications directly to customers, asking them to confirm the records maintained by the company. This allows auditors to check for errors, which may range from deliberate falsifications to poor record keeping. Such evidence can be especially valuable because it comes from a third party outside the company who has no vested interest in the outcome of the audit, and thus can theoretically be relied upon to supply correct information.
There are two types of accounts receivable confirmation. In a positive request, the auditor asks the client to respond, confirming the accuracy of information, or correcting it if it is wrong. Negative requests indicate that clients should only respond if there is an error; the auditor assumes the information is correct if no response ever arrives. One flaw with this approach is that clients may be reluctant to write auditors, in which case the absence of evidence may not mean the company’s records are accurate.
This process involves drawing up a letter with information about the audit and the data kept on file by the company. The company supplies the names and addresses of clients, and the auditor sends out the accounts receivable confirmation paperwork. Clients are asked to respond to the auditor directly, not the company, so the paperwork never passes through the hands of people who might have a conflict of interest. Auditors compile the information, check it against records, and use it in a final audit report to express an opinion on the state of the company’s books.
The selection process for which clients should get an accounts receivable confirmation can be a mixture of carefully chosen targets and random ones. Very large outstanding as well as past due accounts may be scrutinized more closely because they are of particularly special interest. Auditors can also randomly choose from smaller accounts in good standing to get a more general picture of the company’s finances.
Using an accounts receivable confirmation can provide a wealth of valuable audit evidence. It is not without flaws, however, because clients may refuse to respond to a request, or the company might have incorrect contact information which means the requests never reach them. Auditors may have to spend substantial time researching and tracking down specific clients to collect data, which can add to the cost of the audit.