How do auditors confirm their clients balances of account receivable?

What Is Positive Confirmation?

Positive confirmation is an auditing inquiry that requires the customer to respond, confirming the accuracy of an item. Positive confirmation requires proof of accuracy by affirming that the original information was correct or by providing the correct information if incorrect.

Key Takeaways

• Positive confirmation is an auditing inquiry that requires the customer to respond, confirming the accuracy of an item.
• Positive confirmation requires proof of accuracy by affirming that the original information was correct or by providing the correct information if incorrect.
• Positive confirmations are used to verify the amounts of liabilities, investments, bank accounts, accounts receivables, and payables.

Understanding Positive Confirmation

Positive confirmation is part of the confirmation procedures that auditors use to confirm specific pieces of information. The recipient of the letter is to reply to confirm accuracy or supply information and send it back to the auditor. Some examples of the information required from auditors include confirming the following:

• The amounts and descriptions of various types of liabilities
• Bank account information including balances
• Inventory amounts and types
• Investments or securities
• Copies of sales invoices to ensure sales were made
• Information or copies of shipping invoices to ensure products were shipped

Confirmation Analysis

Auditors also use positive confirmation letters to verify accounts payable and accounts receivable or companies. Accounts payables are short-term debts owed by companies to their suppliers. Accounts receivables represent money owed by a company's customers for the sale of goods. Receivables and payables typically have payment terms of 30, 60, or 90 days—meaning a payment needs to be made within that time frame.

An auditor can verify the accuracy of the accounts receivable records being examined by determining if the records accurately reflect the transactions that have occurred between the company and its customers. Contacting customers directly helps auditors verify that listed accounts actually exist, that balances shown as owed are correct, and that payments marked as received are true.

Accounts receivables are short-term assets and can be used by companies as collateral to obtain loans or financing from banks. As a result, it's important that the receivables are audited to confirm that the sales were made as well as confirm that the funds from the sales are being collected on time.

If a company wishes to audit its accounts payable records, it must review any outgoing funds associated with debt obligations or creditor payments. The process may require a review of billings and a reconciliation of those amounts with payments that were recorded as being made. Additionally, the business may choose to match the aforementioned amounts to actual withdrawals from payment accounts to confirm accuracy.

Many fintech startups have emerged to solve the digitization of this process. Taulia, Tipalti, C2F0, and Liquidx are all names operating the account payables and account receivables digitization solutions. These services open doors of simplification as well as challenges for auditing and positive confirmation matters.

Positive vs. Negative Confirmation

While positive confirmation requires supporting information despite the accuracy of the original records, negative confirmation requires a response only if there is a discrepancy. During a negative confirmation request, a business may be asked to confirm that an account balance is listed at a specific amount, such as $100,000. If the current account balance is $100,000, no additional action is required. 

If the balance differs, additional information must be provided to explain the difference. Negative confirmation letters are also used to ascertain if the recipient wants to opt out of an event outlined in the letter.

Negative confirmation is more commonly used if the individual's or business's records are generally considered to be highly accurate. Typically, the company receiving a negative confirmation is believed to have stringent internal requirements and business practices. As a result, negative confirmation is much less costly and time-intensive for auditors since they usually only need to send one letter out.

Conversely, positive confirmation requests are more involved since financial records must be furnished, even if the original information in the letter was correct. Also, positive confirmation requests are more likely to be used if the company's books are suspected of having errors. However, a positive confirmation letter is more common in complex transactions since it's more accurate and ensures that everyone is on the same page—or has the same financial information. In lending, for example, auditors use positive confirmations to banks and companies to ascertain the exact amount of a debt.

As a result, a positive confirmation tends to be a better representation of the financial information than a negative confirmation since it's an explicit request that has been returned by the recipient. If any dispute arises, a positive confirmation is physical evidence that the information was confirmed.

Example of Positive Confirmation

If an individual or business entity is selected for an audit by the Internal Revenue Service (IRS), the taxpayer must produce records to affirm the information listed on the selected tax returns. The audit might include a positive confirmation request for all sources of income, verification of applicable deductions taken, and proof of claimed gains or losses.

Even if the information required for the audit matches what was reported, all evidence must be submitted to satisfy the audit requirements.

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