Debtors confirmation procedure: balance confirmation in practice

A debtors confirmation procedure obtains direct written evidence from customers of the amount they owe at the balance sheet date, using either a positive request, which asks the customer to reply whether or not they agree, or a negative request, which asks them to reply only if they disagree. Because response rates on positive requests in Indian mid-market practice are often well below full, the procedure is incomplete without a defined plan for non-responses and disputed balances, built around alternative procedures such as testing subsequent cash receipts and matching invoice-level detail, rather than treating a low response rate as an unresolved gap in the file.

Positive versus negative confirmation

Selecting which debtors to confirm

Selection should combine risk and coverage rather than picking the largest balances alone, which is the single most common shortcut that weakens the exercise.

• All individually material balances above a stated threshold
• A sample from the remainder, selected to give reasonable coverage of total receivables by value, not just by count
• Balances that are old, disputed, or have unusual activity such as a large credit note or a round-sum adjustment during the year
• Related-party balances, which usually warrant confirmation regardless of size because of the separate disclosure and pricing questions they raise
• Debit balances in creditor accounts and credit balances in debtor accounts, both of which are easy to miss if selection is driven purely by a sorted balance list
• Zero or fully provided balances that were large during the year, where the movement to zero is itself worth confirming

Running the exercise

1. 01Control the despatchConfirmation requests should be prepared and sent (or the request put on the client's letterhead but despatched) with the audit team retaining control of the mailing list and the reply address, so that a response cannot be intercepted or redirected by client staff before it reaches the auditor.
2. 02Set a realistic reply window and follow upA single mailing with no follow-up predictably produces a low response rate. Build at least one reminder round into the plan from the start rather than treating follow-up as a fallback once responses are seen to be thin.
3. 03Reconcile each response receivedA response rarely agrees to the paisa, because the customer's own ledger reflects goods in transit, invoices raised near year end that have not reached them, or payments sent but not yet recorded by the client. Reconcile the difference item by item rather than accepting a response as a match because the headline figure is close.
4. 04Chase every non-response before moving to alternative proceduresAlternative procedures substitute for a response that genuinely cannot be obtained, not for one that was never actually followed up.

Handling non-responses

Where a second request also gets no reply, the balance moves to alternative procedures rather than being left unaudited. Standard alternative procedures for a receivable balance include checking subsequent cash receipts against the invoices that made up the balance, and examining the underlying sales invoices, dispatch evidence and acknowledged delivery documents that support the recorded amount.

1. 01Test subsequent receiptsMatch cash or bank receipts after the year end to the specific invoices they settle, not just to the customer account in aggregate, so that a receipt against an invoice raised after year end is not wrongly used to support a pre-year-end balance.
2. 02Vouch the invoice-level detail making up the balanceWhere receipts are insufficient or delayed, trace the invoices comprising the outstanding balance to dispatch evidence and customer purchase orders, the same evidence chain used in recognition testing.
3. 03Consider the ageingA non-responding customer with a balance that has since been fully or substantially settled is a weaker concern than one with a balance that remains outstanding and ageing further, which should feed directly into the provisioning assessment.

Disputed balances

A customer who replies disagreeing with the stated balance has given you more useful evidence than one who agrees, because the dispute itself needs resolving. Document the reason given, reconcile the difference, and establish whether it reflects a timing difference, a genuine error in the client's records, or a substantive dispute over goods or pricing that may indicate a need for a credit note or a provision.