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Accounting Information > Public Accounting > Confirmations
Confirmations

One technique used to gather evidence in an audit are confirmations. Confirmations are written acknowledgements from third parties, confirming certain transactions, balances, or other information. Confirmations are commonly used for cash and accounts receivable balances.

 

Confirmation of receivables is a generally accepted auditing procedure. A positive confirmation request is sent to the customer asking the customer to return the confirmation directly to the auditor. The customer is asked to note their agreement or disagreement with the balance per the client’s records. Often, the confirmation request is sent with a detailed statement of the accounts receivable balance. It is most advisable to use positive confirmations when the individual account balances are fairly large, or if there is some reason to believe that a significant number of errors may exist in the accounts.

A negative confirmation request has wording that is similar to that in the positive confirmation request. The difference is that the customer is asked to only return the confirmation to the auditor if they disagree with the account balance per the client’s records. Negative confirmations should only be utilized with a large number of small account balances, if the individuals receiving the confirmation requests are expected to carefully consider them, and internal accounting controls are deemed to be strong.

When a positive confirmation request is sent, and no reply is received within a reasonable length of time, a second request is sent. If there is no reply to the second request, the auditors will use other procedures. After an account has been selected for verification, the auditor must obtain some kind of evidence.

Auditors are required to investigate any exceptions to both positive and negative confirmation requests. Sometimes a reported difference can be explained by a cash receipt in transit or a late charge added by the client. Any comments written on confirmations must also be investigated. For example, if a customer writes, “paid in full on January 15,” the auditor needs to confirm that the account was in fact paid in full on January 15, by tracing the payment to a cash receipt on or around that date.

An irregularity called lapping is sometimes uncovered when confirmation of accounts receivable is performed. When someone has access to cash receipts and accounts receivable, they may redirect cash receipts from one customer to their personal use, and post a later cash receipt from another customer to the account of the first customer. This practice leaves the wrong balance in the account of the second customer, which would then be covered by a cash receipt from a third customer, and the cycle would continue.

Confirmations may also be used for accounts payable, inventory held by others, long-term investments, and long-term debt. For many account balances, the confirmation request will not state the balance per the client’s records. As in the case of confirmations for accounts receivable, other audit procedures will also need to be performed for the account balances being confirmed.

Are you looking for someone to help you with your auditing, bookkeeping, accounting, or tax needs? Do you need someone to examine your financial statements? You have come to the right place! Try the CPA search feature on this website to find a qualified professional in your area to help you with all your tax and accounting needs.

 
 
 
 
 
 
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