Accounts receivable: the confirmation presumption, nonresponses and alternatives

In this lesson you will

State the three exceptions to the receivables confirmation presumption in AU-C 330.20
Design a positive confirmation sample and control the process under AU-C 505.07
Select alternative procedures that address existence for each nonresponse
Evaluate the allowance with subsequent receipts and aging evidence

The presumption

AU-C 330.20 says the auditor should use external confirmation procedures for accounts receivable, except when one or more of these applies:

The overall account balance is immaterial.
External confirmation procedures would be ineffective.
The assessed risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.

AU-C 330.32 requires the auditor to document the basis for not confirming receivables when the balance is material. "Accounts receivable" here means claims against customers from sales of goods or services in the normal course of business, and a financial institution's loans.

"Ineffective" has a specific meaning in the application material: based on prior years or similar entities, response rates to properly designed requests will be inadequate, or responses are known or expected to be unreliable. A note saying "customers do not respond" with no history and no attempt at a better-designed request does not meet that bar.

SAS 150 moves the requirement into AU-C 505 for periods ending on or after December 15, 2028. The new paragraph lists two exceptions: confirmation would be ineffective, or risk is low and other planned procedures address it. It also lets the auditor meet the requirement by directly accessing information held by a knowledgeable external source. See the SAS 150 guide.

Running the process

AU-C 505.07 requires the auditor to control the requests: decide what to confirm, select the confirming party, design the request so it goes to the right party and comes back directly to the auditor, and send the requests and follow-ups. Test addresses before sending, especially email addresses supplied by the client.

Positive requests ask for a reply in every case. Negative requests ask for a reply only on disagreement and give less persuasive evidence. AU-C 505.15 bars negative requests as the sole substantive procedure unless all four conditions are present: low assessed risk with evidence that relevant controls operate effectively, a large number of small homogeneous balances, a very low expected exception rate, and no known reason recipients would disregard the requests.

Customers that pay by invoice often cannot confirm a balance. Confirming specific open invoices raises response rates.

Nonresponses and exceptions

AU-C 505.12 requires alternative procedures for each nonresponse. For receivables, the standard's examples are examining subsequent cash receipts (matched to the specific invoices paid), shipping documents and other documentation supporting existence. Subsequent receipts are the strongest alternative because they come from the customer through the bank. A shipping document proves goods left the building, not that the customer owes the amount.

A nonresponse can also signal a problem with the balance itself. A cluster of nonresponses from new customers or from customers with the same address is a fraud indicator to follow up, not a sampling nuisance.

AU-C 505.14 requires investigation of every exception to determine whether it indicates misstatement. Payments in transit and disputed invoices are common. Disputed invoices also bear on the allowance.

Valuation is separate

A confirmation shows the customer acknowledges the debt, not that they will pay it. Test valuation with the aging, cash collected after year-end, credit files for large past-due balances and the allowance method under ASC 326. The receivable aging and allowance workpaper and the guide on alternative procedures for unanswered confirmations help here.

Common file findings

No confirmation of a material balance and no documented basis.
Client staff sending or collecting requests.
Nonresponses closed with "agreed to invoice."
Exceptions marked "timing" with no evidence.

Worked example

Confirmation results at Ridgeview Packaging Co.

Receivables total $3,600,000 across 410 customers. The team confirms the 12 balances over $100,000 ($2,050,000) and a sample of 40 from the remaining $1,550,000. Performance materiality is $90,000.

All 12 large balances confirm without exception. Results for the sample of 40 ($310,000 selected): 31 replies agree ($241,000); 3 replies show exceptions (balances totaling $27,000); 6 nonresponses ($42,000).

Exceptions: two are payments mailed December 30 and received January 3 ($9,800, timing, not a misstatement). One customer disputes a $4,600 invoice for goods returned December 20; the credit memo was issued January 15. That is a misstatement of $4,600.

Nonresponses: subsequent receipts matched to specific invoices cover $35,500. The remaining $6,500 (one customer) is traced to a signed bill of lading and the customer's purchase order.

Projection: the sampled remainder had a misstatement of $4,600 on $310,000 selected, a rate of about 1.48 percent. Projected to the $1,550,000 population: $1,550,000 x 0.0148 = about $23,000. That figure includes the $4,600 found. It is below performance materiality, so the team accumulates it under AU-C 450 and adds the $4,600 credit memo to the cutoff testing.

Self-check

Answer each question before you open the answer.

Receivables are material and the client says customers never answer. Can you skip confirmations?
Show answer
Only if you can support that confirmation would be ineffective, based on prior experience or similar entities showing inadequate response rates to properly designed requests or unreliable replies. You document the basis under AU-C 330.32 and perform other substantive procedures.
Which alternative procedure gives the best existence evidence for a nonresponse, and why?
Show answer
Subsequent cash receipts matched to the specific invoices. The cash comes from the customer through the bank, which is external evidence that the customer owed those invoices.
Can negative confirmations alone address existence for a distributor with 60 customers and balances averaging $40,000?
Show answer
No. AU-C 505.15 requires a large number of small, homogeneous balances, among other conditions. Sixty sizable balances do not meet that condition.
Does a clean confirmation response support the allowance for credit losses?
Show answer
No. Confirmation supports existence and rights. Collectibility needs separate evidence such as subsequent receipts, aging and the allowance method.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error