Audit and Assurance · The audit of specific items

Audit of Receivables and Receivables Confirmation for ACCA Audit and Assurance

Updated 11 October 2026 · Fact-checked

Auditing trade receivables means getting evidence that balances exist, belong to the client, are valued correctly and are fully recorded. The main procedures are receivables confirmation (circularisation), alternative procedures for non-replies, after-date cash receipts testing and review of the allowance for irrecoverable debts.

Understand Audit of Receivables and Receivables Confirmation

Trade receivables are amounts customers owe the company at the year end. They are usually material. The main risks are that balances are overstated, either because they do not exist (fictitious sales, cut-off errors) or because they are not recoverable.

So the key assertions are existence, rights and obligations, valuation and allocation, completeness and cut-off. Existence and valuation matter most. Receivables are often overstated because management wants higher profit. Think overstatement first.

Receivables confirmation (circularisation) means the auditor writes to customers, asking them to confirm the balance owed. It is strong evidence for existence because it comes from an external third party. The auditor must control the process: select the customers, send the requests, and have replies come back directly to the auditor, not to the client.

A positive confirmation asks the customer to reply whether or not they agree, stating the balance or giving the correct figure. A negative confirmation asks the customer to reply only if they disagree. Positive is more reliable because silence cannot be mistaken for agreement. Negative is cheaper and suits large numbers of small balances where risk is low and customers are likely to respond to errors.

If a customer does not reply, the auditor performs alternative procedures. The best is after-date cash receipts testing: check that cash received after the year end was banked and relates to the balance at the year end. Also check despatch documents and invoices to support the sale. For valuation, review the aged receivables list, post year-end cash, correspondence, and credit status of slow payers, then assess the allowance for irrecoverable debts against IFRS 9 expected credit losses.

Key rules to remember

Net receivables: Net receivables = Gross receivables − Allowance for irrecoverable debts (expected credit losses); Test both the gross balance (existence) and the allowance (valuation).
Positive confirmation: Customer replies in every case, agreeing or stating the difference; More reliable evidence. Use for high-value or high-risk balances, or when expected error is high.
Negative confirmation: Customer replies only if they disagree; Less reliable because no reply is not proof of agreement. Use only for low risk, many small balances.
Non-reply rule: No reply to positive request → perform alternative procedures; Do not treat a non-reply as evidence. Use after-date cash and supporting documents.
Control of confirmations: Auditor selects, sends, and receives replies; If management controls the process, reliability falls sharply.

How to solve Audit of Receivables and Receivables Confirmation questions

Use this method for any question on receivables procedures, whether it asks you to list tests, choose a confirmation type or respond to a problem.

1Identify the assertion at risk in the scenario. Usually existence, valuation, cut-off or rights.
2Choose the evidence that best matches it. Confirmation and sales documents for existence; ageing, cash after date and credit status for valuation.
3If circularisation is asked, state the process: select items, agree to ledger, send under auditor control, replies come directly to the auditor.
4Pick positive or negative using the facts: risk, size of balances, number of customers, expected response.
5Say what to do with non-replies and differences: alternative procedures, investigate differences for timing issues, disputes or error.
6Link to the allowance: review ageing, post year-end receipts, disputes, and customer financial difficulty.
7Tie each procedure to its purpose in the answer. State what it proves, not just what it is.

Quickest way: Assertion-to-procedure matching

When to use it: Use in Section C when you must list procedures quickly and in OT cases when selecting the best evidence.

Write E, V, C beside the question: Existence, Valuation, Cut-off.
For E: confirmation, then after-date cash, then delivery notes and invoices.
For V: aged list, after-date cash, correspondence, credit status, expected loss review.
For C: last despatch notes and GRNs before and after year end tied to invoices and the ledger period.
Add one sentence of purpose to each procedure to earn the mark.

Common mistakes in Audit of Receivables and Receivables Confirmation

Saying a negative confirmation with no reply proves the balance is correct.
Students treat silence as agreement.
Fix: State that silence may mean the customer ignored the letter. Negative confirmations give weaker evidence and suit only low-risk populations.
Letting the client send the requests or receive the replies.
It seems more practical.
Fix: The auditor must control selection, despatch and receipt. Otherwise the client could interfere or alter replies.
Treating a non-reply as an error and proposing an adjustment.
Students confuse no reply with a disagreement.
Fix: A non-reply means perform alternative procedures. Only unresolved differences or failed alternatives lead to a misstatement.
Listing after-date cash receipts as a test of the allowance only.
It is linked mentally to recoverability.
Fix: It supports existence and valuation. Cash received after the year end shows the customer exists and the balance was likely valid and recoverable.
Writing general procedures such as 'check the ledger' with no purpose.
Students list without tying to assertions.
Fix: Each point should name the procedure, the document and what it proves, for example, 'trace despatch notes to invoices to confirm occurrence'.
Ignoring reasons for differences in circularisation replies.
Students stop at the difference.
Fix: Investigate cash in transit, goods in transit, disputed items, returns and posting errors. Some are timing differences, not misstatements.

Worked examples

Example 1

Section C style: Your client has 1,200 trade receivables. A few large customers make up most of the total balance, and most others owe small amounts. Management is under pressure to meet profit targets. Explain how you would use receivables confirmation and what you would do about non-replies. (8 marks style)

Show the solution

Risk: balances may be overstated, so existence and valuation are at risk. The profit pressure raises the risk further.
Selection: use positive confirmations for the large balances, as they cover most of the value and carry the highest risk.
For the many small balances, a negative confirmation or a sample could be considered only if the control risk is low and errors are expected to be few. Given the pressure, I would still sample some positively.
Control: agree balances to the ledger first. The audit team sends the letters, includes an auditor-addressed return envelope and receives replies directly.
Replies: investigate differences, such as cash or goods in transit, disputes, returns or errors. Decide whether any is a misstatement.
Non-replies to positive requests: send a reminder, then perform alternative procedures.
Alternative procedures: examine after-date cash receipts matched to year-end invoices; agree invoices to despatch notes and orders; check customer correspondence.

Answer: Use positive confirmations for the large balances and consider limited negative confirmation or sampling for small ones. Keep the whole process under auditor control, investigate differences, and use after-date cash and despatch documents for non-replies.

Example 2

At the year end, receivables are ₹80,00,000 and the allowance is ₹2,00,000. The aged list shows ₹6,00,000 is over 120 days. Post year-end cash of ₹1,50,000 has been received on those old balances. One customer owing ₹2,50,000 of the old balances has entered liquidation and no cash is expected. Calculate the minimum extra allowance needed for the liquidation customer and the resulting net receivables if nothing else changes. Explain your audit approach.

Show the solution

Identify the specific issue: the customer in liquidation owes ₹2,50,000 and no recovery is expected.
The existing allowance is ₹2,00,000 for the whole population, so I need to see whether it already covers this customer. Assume it was not specifically provided.
Minimum extra allowance: ₹2,50,000 for this balance, assuming no recovery. Revised allowance = ₹2,00,000 + ₹2,50,000 = ₹4,50,000.
Net receivables = ₹80,00,000 − ₹4,50,000 = ₹75,50,000.
Audit approach: obtain the aged list and agree it to the ledger; test ageing by sampling invoices; review post year-end cash for the ₹6,00,000 old balances; the ₹1,50,000 received supports recoverability of that part only; inspect liquidation notice and correspondence; assess whether the remaining over-120-day balances need allowance; discuss with management and evaluate their method against IFRS 9 expected credit losses.

Answer: Extra allowance of at least ₹2,50,000 gives a total allowance of ₹4,50,000 and net receivables of ₹75,50,000, assuming the existing allowance did not already cover this customer.

Exam tips

Always tie the procedure to an assertion. Existence is confirmed by circularisation; valuation is tested through ageing, cash after date and credit status.
In positive versus negative questions, justify the choice from the scenario: risk, size, number of balances and expected error rate.
For non-replies, name alternative procedures and put after-date cash receipts first. Say what it proves.
In OT questions, read for who controls the process. Client-controlled confirmations are a weakness.
For irrecoverable debts, link to IFRS 9 expected credit losses and ask about management's method and assumptions.

Audit of Receivables and Receivables Confirmation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Receivables and Receivables Confirmation: frequently asked questions

What is the difference between positive and negative confirmation?

A positive confirmation asks the customer to reply in every case, either agreeing the balance or stating the difference. A negative confirmation asks for a reply only if the customer disagrees. Positive gives stronger evidence, because a missing negative reply may just mean the customer did not read the letter.

Why are after-date cash receipts good evidence?

They show that the customer paid money that reached the bank after the year end, which supports both existence and recoverability. You must check the cash relates to year-end invoices and not to later sales. It is the main alternative procedure when customers do not reply.

Can the auditor rely on a confirmation sent by the client?

Not safely. The auditor should control selection, sending and receipt of the replies. Otherwise management could change addresses, hold back requests or alter replies, which weakens the reliability of the evidence.

How do you audit the allowance for irrecoverable debts?

Review the aged receivables list, post year-end cash, disputes, and the financial position of slow-paying customers. Then test management's method for expected credit losses and check that it is applied consistently and in line with IFRS 9. Challenge optimistic assumptions.