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Chapter 17
TRADE RECEIVABLES
1. The relevant assertions
If you want to audit the receivables balance you have to find ways of testing each assertion that the 
receivables balance makes: existence, rights and obligations, completeness, accuracy, valuation and 
allocation, classification and presentation.
2. External confirmation
Assuming trade receivables are material, it’s almost universal to use external confirmation procedures 
(a 'receivables circularisation') to obtain audit evidence. This involves asking customers to respond 
directly to the auditor to confirm what they owe. This provides good evidence about the existence of 
a receivable and its accuracy, but it says very little about the valuation of a receivable. It could well be 
that a customer who is in trouble will verify that the receivable exists to play for time: they don’t want 
to arouse suspicions. Quite a separate valuation exercise has to be done later.
There are two types of confirmation request:
๏
Positive 
-
requests a reply from everyone who has been written to, whether or not 
they agree with the balance. This is most suitable where the risk of 
misstatement is high (e.g. weak internal controls, errors expected or 
suspicion of irregularity or disputed amounts). 
๏
Negative 
-
requests a reply only if the customer does not agree with the balance 
that they have been asked to confirm. But if you don’t get a reply how do 
you know whether that person agrees with the balance or whether they 
simply haven’t bothered replying? This type is appropriate when control 
risk is low (i.e. errors are not expected), there is a large proportion of 
smaller balances and customers are not expected to ignore the request.
A request for confirmation will usually include management's authorisation or encouragement for the 
customer to disclose confidential information to the auditor. The auditor must have control over 
sending the requests and receive responses directly. You may remember when we looked at the 
reliability of audit evidence that auditor-directly obtained evidence is more reliable than client-
obtained evidence. Here, if the customers replied to the client, the client could simply throw away 
those letters which show disagreement and pass on only those letters which show agreement. That 
would give the auditor quite a wrong impression of the accuracy of the receivables.
Very often stratification will allow a very large percentage of the receivables balance to be covered by 
requesting relatively few confirmations. Perhaps the key accounts of the client will account for 80% of 
the receivables balance.
In addition some of the balances will be selected at random for confirmation, together with those 
balances which have not moved for some time, credit balances and perhaps nil balances.
The auditor has to keep a careful schedule of customers written to, replies received, where replies 
agree and where they don’t agree.