Accounts receivable confirmations are an important part of an accountant’s annual audit of a financial statement. The accountant uses accounts receivable confirmations to test the existence of the client’s reported receivables for sales and services. Beyond simply confirming the existence of the accounts receivables, and thereby contributing to an accurate and reliable financial statement, the accounts receivables are tested for completeness and valuation through additional audit procedures. The main goal of accounts receivable confirmations is to test the present financial statement to ensure that their client’s economic situation is accurately reflected by their financial statement. In accounting terminology this is referred to as a “true and fair view.”
Accounts receivable confirmations can also serve additional functions than those described above. The primary purpose of an annual audit is not to detect fraud in a client’s financial statement, however potential acts of fraud will be indirectly tested by the accounts receivable confirmations. Purposeful and repeated fraud is typically very well hidden by the perpetrators, thus making it difficult to detect. Accounts receivable confirmations can however be an important indicator that something is not right. By sending confirmation letters to the relevant debtors and reviewing the responses from their accounting departments, the accountants are able to take the first steps in detecting potential fraud.
The accountant cannot conclude whether a debtor is relevant based solely from the size of the balance at the date of the financial statements release since a debtor can be registered as owing too high of an amount. This leads to too much revenue in the financial statement which is a more typical method of fraud than fraudulently lowering the level of revenue in the financial statement. Fraud can take many different forms, but much can be discovered via accounts receivable confirmations because the external debtors and their accounting departments will be the first to point out any differences between your client’s accounts receivables and their own accounts payable records.
When a company is found guilty of committing fraud, there is always the question of who should be held accountable. The company and any other parties benefitting from the fraud are typically the guilty parties, but very often a portion of the blame is placed on the auditor if they have not assisted in detecting the fraud. The spillover from cases like this can have an unfortunate effect on the auditor’s professional reputation.
Accounts receivable confirmations can be sent out several times a year – either for all accounts receivable balances or for single invoices. Accounts receivable confirmations can be sent automatically via Audit Application’s online tool providing a significant opportunity to detect fraud using a minimal amount of time for the accountant, the client and the debtor. This provides accountants with the ability to detect fraud before it’s too late as well as to improve the true and fair view of their annual audits in general.
Contact Audit Applications to learn more about how you can detect fraud and protect your reputation with our online accounts receivable confirmation tool.