When an auditor is examining the accounting records of a client company, a primary technique for verifying the existence of accounts receivable is to confirm them with the company's customers. The auditor does so with an accounts receivable confirmation. This is a letter signed by a company officer (but mailed by the auditor) to customers selected by the auditors from the company's accounts receivable aging report. The letter requests that customers contact the auditors directly with the total amount of accounts receivable from the company that was on their books as of the date specified in the confirmation letter. The auditor typically selects customers for confirmation that have large outstanding receivable balances, with secondary consideration given to overdue receivables, followed by a random selection of customers having smaller receivable balances.
Since the information obtained through confirmations is obtained from a third party, it is considered to be of higher quality than any information that an auditor could have obtained from the client company's internal records.
There are two forms of confirmation, which are:
- Positive confirmation. This is a request to provide a response to the auditor, whether or not the customer agrees with the receivable information listed in the confirmation.
- Negative confirmation. This is a request to contact the auditor only if the customer has an issue with the accounts receivable information contained within the confirmation. This is a less robust form of evidence, since there is an inclination by customers to not contact the auditor, which leads to the presumption by the auditor that customers agree with the presented accounts receivable information.
If customers do not return confirmations to the auditor, the auditor may go to considerable lengths to obtain the confirmations, given the high quality of this form of evidence. If there is no way to obtain a confirmation, then the auditor's next step is to investigate subsequent cash receipts, to see if customers have paid for those invoices that were not confirmed. This is a strong secondary form of evidence that the accounts receivable outstanding at the end of the reporting period being audited were in existence at that time.
If the information received from a customer varies from the receivable amount listed in the company's receivable report, the auditor usually asks the company to reconcile the difference, which the auditor can then take further action on, as necessary.