CHRISTIAN SERVICE UNIVERSITY

COLLEGE
DEPARTMENT OF BUSINESS STUDIES

KUMASI.

MARCH 2010.

• Explain the concept of debtor’s circularization.

• Describe the audit procedure that should be followed when planning

• Design a draft of confirmation letter to a list of debtors spelling out

AUTHOR:

10235934 Ankomah-Darko Charles

TUTOR: Mr. Stephen Alewabah

PROGRAM: Bachelors Degree in Business Administration

SUBJECT: Auditing and Investigation II

LEVEL & SEMESTER 400, Second semester

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THE CONCEPT OF DEBTORS’ CIRCULARIZATION

Debtors’ circularization represents an external source of evidence provided in support of the

assertion of existence and to lesser extent, valuation and completeness with respect to debtors. It

is a verification procedure where by trade debtors are contacted directly by the auditors to

confirm their balances. It has become so extensive that auditors have now developed a standard

format for the purpose. The fundamental reason for the usage of theses circularization is that its

reliable audit evidence coming from an independent source and it’s in documentary form.

CIRCULARIZATION PROCEDURES

The request sent to debtors may be either a specially prepared form of letter or an attachment to

the client’s normal statement giving a copy of the debtor’s ledger account for an appropriate

period and, in the case of a positive request, accompanied by a pre-paid reply form.

Whilst entities may be expected to favour circularising debtors for audit purposes on the form of

statement normally in use, it is to be preferred that the debtor should be sent a copy of his ledger

account for an appropriate period as shown in the client’s books, as by this means it is more

likely that errors and fraud will be detected. This can be particularly useful where running

accounts are maintained, possibly involving large amounts and many entries, for example,

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contracting work, or where there is evidence that accounts are in dispute or are not being settled

in accordance with the client’s terms of trade.

Confirmation procedures may be directed towards account balances with debtors or towards

individual items included in such balances. The latter procedures may be particularly useful

when the nature of the accounts or the debtors’ records is not likely to permit successful

confirmation of account balances.

The statements will normally be prepared by the client’s staff, from which point the auditors, as a

safeguard against the possibility of fraudulent manipulation, must maintain strict control over the

checking and despatch of the statements. Precautions must also be taken to ensure that

undelivered items are returned not to the client, but to the auditor’s own office for follow up by

him.

Confirmation of debtors should be carried out either at the balance sheet date or, if internal

control is adequate, prior to the year end with an analytical review of transactions in the

intervening period. Where the confirmation is carried out at of a date other than the balance

sheet date, an analysis of the general ledger control account should be obtained and the entries

for the intervening period should be test checked to supporting records.

When the positive request method is used the auditors must:

(a) Follow up by all practicable means those significant debtors who fail to respond, and

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 (b) Reconcile any difference between the balance confirmed by the debtor and the client’s

records.

After two, or even three, attempts to obtain confirmation, a list of the outstanding items will

normally be passed to a responsible company official, preferably independent of the sales

accounting department, who will arrange for them to be investigated; this does not of course

absolve the auditor from satisfying himself that the clearance procedure is properly carried out

and from examining the results. Where there is any limitation in the follow up procedure it is all

the more important to apply other auditing procedures to establish that there existed a valid debt

from a genuine customer at the date of the verification. These procedures may include:

(a) Examination of payments subsequent to the date of the confirmation where there is

evidence that the payments are received from or on behalf of the debtor and that they are

in satisfaction of specific items;

(b) Examination of evidence such as customers’ orders in correspondence files, shipping

documents and billing records, and stock control procedures.

Whether there is a satisfactory rate of response or not, any inaccuracies revealed by the

circularisation or by the additional tests mentioned above may have a bearing on other accounts

not included in the original sample. In these circumstances the auditor will have to consider

what further tests he can make in order to satisfy himself as to the correctness of the customers’

balances taken as a whole. A tabulation of the results of the test by number and by value may

help the auditor to form a view as to the adequacy of the work already carried out.

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 A DRAFT OF DEBTORS CONFIRMATION LETTER

KOFI ANKOMAH & ASSOCIATE,

TATA SERVICES LTD.

Dear Sir/Madam

Balance as at 31.12.2009 GH 9,200.00

As part of our annual audit, we request that you confirm the balance owing by your company to
masers kofi Ankomah & Associate our auditors, the total outstanding till 31 st December 2009.
Which according to our records amount to GH 9,200.00 as shown by the enclose statement

If you agree with the balance shown, please complete “Part A” of this letter. If you do not agree,
please complete “Part B” of this letter and reconcile the difference.

Please sign and return the completed letter directly to our auditors in the enclose stamped address
envelope

Yours faithfully
Radiant Limousine Services Private Limited
Alok Rakshit
(Director)

_____________________________

I/We have compared the statement of account with our records and advise that:

Part A The balance of GH……………….. at 31st December 2009 agrees with our records.

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Part B Our records show a balance of GH ………………………as at 31st December 2009 and a
reconciliation of the difference is below/attached.

Yours faithfully

______________________________ ______________________________
Signature Position

______________________________
Name

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REFERENCES

• Alewaba S, lecture note

• Audit guidance statement (AGS 2).

• Caster P, “the role of confirmation as audit evidence” journal of accountability, February

1992, pp 73-76.

• Woolf E “Auditing today” prentice hall, 5th edition.

• Alvin A, Arens and James K “Auditing – an Integrated Approach” Prentice Hall, 7th

edition