Accounts Payable Confirmation
Accounts Payable confirmation is the process which an external auditor sends a confirmation to clients’ suppliers to confirm the carrying amount of accounts payable. External auditors want to cross-check between suppliers’ records and the client’s record.
Accounts Payable is the current liability balance that is presented on the company balance sheet. It represents the amount that client owes to the suppliers throughout the normal business transaction.
Accounts payable confirmation is one of the testing procedures that auditors to verify the account balance. It is more reliable as the evidence received from the third parties rather than the client’s document.
Auditor will as the client prepare the confirmation base on their template. It must contain the client authorization which allows the supplier to reply as it is confidential information.
The confirmations must be sent by the auditors. They have to ask the supplier to send it back to the auditor’s office directly. The document should not go through the client as the information may be modified for some reason.
Accounts payable confirmation is used in addition to the substantive test that auditors use during the fieldwork. It can provide additional evidence for auditor to make the conclusion. The confirmation can help to ensure accuracy, existence, and so on.
The confirmation is effective when the client has major suppliers that cover a large portion of accounts payable. It is not practical to send confirmations to small suppliers with a low amount. It will increase the workload with less coverage.
Component of Accounts Payable Confirmation
The accounts payable confirmation should include the following items such as:
- Name of the clients: It helps the supplier to know the owner of confirmation.
- Client letterhead: It is easy to know the clients’ names as well.
- Approval from client’s management: It is the approval for supplier to release such confidential information to the auditors.
- Name of audit firm that performs the audit for the client: It helps the supplier to reply to the correct auditors.
Alternative Procedure for Accounts Payable Confirmation
Auditor may not receive all confirmation replies from the third parties. The suppliers may not be able to reply to auditors for various reasons. Sometimes the reply or confirmation is not delivered due to an accident along the way. Auditor can perform alternative testing as follows:
- Call contact the suppliers: The auditor can search for suppliers’ contact from reliable sources and call to talk with the finance department. They should not get contact numbers from clients as they may talk to someone else, not the real suppliers. However, it can be used as the last resource and they have to be confirmed with other methods such as email.
- Email follow-up: Auditor can get the official email and follow up with the finance department. They have to make sure that it is the suppliers’ official email. Auditor can ask supplier to send electronic confirmation. They have to request the original confirmation if possible.
- Check subsequent payment: We can verify the accounts payable by checking the subsequent payment that client paid to the suppliers. It is a short-term payable, so it will not take long for the client to pay the supplier. The suppliers will not deliver goods or services if the payable is longer than the term allow. Auditor should check if there is a payment to the accounts payable which is not recorded on the balance sheet date, it will reflect the unrecorded balance.
- Review next year’s adjustment: Auditor can review the client’s journal entry in the subsequent year to see if there are any adjustments. The adjustment will show the error made in the prior year.
Two types of accounts payable confirmation
There are two types of accounts payable confirmations that auditors can use to confirm the balance.
- Accounts payable positive confirmation: it is the accounts payable confirmation that the auditor requires the supplier to respond to the auditor whether it is right or wrong. The supplier has to respond with the correct answer.
- Accounts payable negative confirmation: it is the accounts payable confirmation that auditor requires the supplier to respond only if the amount is wrong. If the amount stated on the confirmation is correct, the supplier can remain silent.