Efficient Tests of Balances Series - No. 13: Sending Just Enough Accounts Receivable Confirmations

The Confirmation Process

Here’s a summary of the accounts receivable confirmation process:
1.  Obtain an aged trial balance of accounts and reconcile it to the general ledger.
2.  Decide on a selection method (random-number, systematic or haphazard), calculate the desired sample size based on risk
and materiality at the assertion level.
3.  Select accounts for confirmation preparation and decide on positive or negative requests.
4.  Prepare confirmations (or supervise client preparation).
5.  When the client prepares confirmations, make sure all those requested are completed and that names, addresses and
amounts agree to client records.
6.  Independently verify a sample of customer addresses (phone book, Google, remittance advices, etc.).
7.  Make copies of confirmations to use as second requests.
8.  Stuff envelopes, or supervise client stuffing.
9.  Insert CPA firm return address envelopes into confirmation request envelopes.
10. Obtain postage and deliver to an off site mail drop.
11. Clear exceptions from replies by inquiries of client personnel and inspection of supporting records.
12. Send second requests on non-replies by repeating steps 7 through 11.
13. Perform alternative procedures on non-replies to second requests by inspecting supporting documents (records for sales,
shipments and subsequent collections).
14. Consider proposing adjustments, recording errors on an Error Analysis Worksheet and performing qualitative error analysis.
15. Project sample error rate to the sampling population.
16. Summarize confirmation statistics to support the existence assertion.

Because of the substantial time required to prepare, control and send confirmations, an auditor’s objective should be to select
just enough confirmations to satisfy the audit objectives. Here are a few of the ways this can be accomplished:
•    Pay attention to the risk assessment process.  Whenever risk of material misstatement at the assertion level is less
than high, we have opportunities to reduce the number of confirmations.
•    Base the lower limit for individually significant items at the assertion level on tolerable misstatement determined at
the lowest risk level possible (as risk goes down tolerable misstatement and the lower limit for individually significant items
goes up).
•    Use the higher level of tolerable misstatement in the model approach to sampling applications.
•    When risk is less than high, consider judgmentally raising the lower limit for individually significant items.
•    When risk is moderate to low, consider using negative confirmations for smaller account balances.

Many CPA firms are learning that the time required for the confirmation process can be reduced significantly by sending
electronic confirmations. Electronic confirmation capability for accounts receivable is available through Capital Confirmation,
Inc. (www.confirmation.com).  These electronic confirmations are secure, save substantial preparation time, reduce turn around
time and are economically priced.  

More information on sending just enough confirmations is available from my live and on-demand self-study courses in a Basic
Staff Training Series which can be accessed by clicking on the applicable box on the left side of my home page,
www.cpafirmsupport.com.

 

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

48274

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

81371

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

53431

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

96348
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
24461

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

60741

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

86384

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

28402

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

69454

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

38029
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
109221
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
29841

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

57703
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
31855
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
36396

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

107770

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

37696

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

118998

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

66723

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

43493
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
71104

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

97856

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

58493