Audit Confirmation

What is an audit confirmation?

Most accounting firms around the world use this well-known auditing process to ensure the validity of the reported accounts receivable and accounts payable balances in their audit clients’ annual financial reports. The typical audit confirmation process to verify the existence of these balances is to send audit confirmations by post or as an email attachment to their audit clients’ customers and suppliers. The audit confirmation contains the balance due by the customer or owed to the supplier on the audit client’s balance sheet date. The customer or supplier can confirm, partially confirm or deny the balance by signing the letter and returning it to the accounting firm in a self-addressed return envelope. The accounting firm receives the letters and can thereby have external verification that their audit client’s accounts receivable or payable are accurate and thereby legally reported in the client’s annual financial report.

Traditional audit confirmation process:

The typical audit confirmation process involves multiple manual actions and usually involves the following five steps:

1.       The audit client provides the accounting firm an export of their customers and suppliers including the accounts receivable and payable balances from their accounting system. It is essential that the accounting firm receive valid accounts receivable and payable information from the audit client’s records.

2.       The accounting firm selects a representative sampling from the audit client’s export and creates the audit confirmations with the help of the mail merge features common in various word processing tools. The resulting audit confirmations contain as a minimum the customer or supplier, the amount in question, the balance sheet date and a confirmation request.

3.       The accounting firm manually sends the audit confirmations to the audit client’s customers and suppliers either by post or electronically as an e-mail attachment.

4.       The audit client’s customers and suppliers reply to the audit confirmation using a self-addressed and stamped envelope or by answering the individual email sent by the accounting firm. This step can often require numerous manual reminders in order to achieve an acceptable response rate.

5.       The accounting firm registers the answers individually as they come in and creates the final audit evidence for the accounting area. The accounting firm most often registers the audit confirmations manually, which increases the risk for data entry errors – especially when dealing with multiple currencies and multiple customers and suppliers.

Room for improvement:

Time management:

Accounting firms work on overdrive during the busy season and are under constant time pressure. The audit confirmation process typically contains several time consuming administrative steps such as creating the audit confirmation documents and mail labels, sending individual letters or emails, registering responses and sending out reminders. In a perfect world, this would be time spent on improving the quality of the audit confirmation process and the audit in general rather than on time consuming and repetitive administrative tasks.

Quality management

Quality in accounting is very important and indeed fundamental for the entire audit. When dealing with manual data input, there is always the possibility for error. Wherever possible, accounting firms should be improving their quality and there is no better place to start than eliminating manual data input, especially when dealing with a systematic and repetitive process like audit confirmations. Best practice is therefore to automate the sending, receiving, data collection and reporting portions of the audit confirmation process by using an online audit confirmation system. Ideally, the only manual tasks in an audit confirmation process should be selecting the audit confirmation sample, reviewing the replies and approving an automatically generated report. The resulting increase in quality will produce a true and fair view of the audit client’s accounts receivable and accounts payable balances – thereby improving the overall quality of the audit.