The Confirmation That Came Back Different
You are auditing the receivables of Calder Trading Ltd, year-end 31 March, with receivables of £3.1m and revenue of £22m. You sent 40 positive confirmations covering £2.2m. Thirty-five replies were received. Of these, three balances totalling £410k were confirmed as different: the customers say they have paid, but the client's ledger still shows the amounts outstanding. The finance director explains this as 'timing' and says the cash was received in April. You note that two of the three customers are connected to a sales director who resigned in February. The client refuses to allow you to contact the customers again. The partner asks whether you can sign off receivables.
1. Analyse the confirmation results and determine what further evidence is needed before receivables can be signed off.
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The confirmation response rate is good (35 of 40, £2.2m of £3.1m), but the exceptions are significant: £410k is 13% of receivables and 1.9% of revenue, and the explanation is unverified. 'Timing' is plausible only if the cash was genuinely received after year-end; that must be evidenced, not assumed. The connection to a resigned sales director raises a fraud risk (fictitious sales or teeming and lading).
Before sign-off, obtain:
- Bank statements and remittance advices for April to trace the alleged receipts to the specific customer accounts and dates.
- The aged receivables ledger and post-year-end cash receipts listing, reconciled to the ledger.
- Sales invoices, despatch notes and signed delivery notes for the three balances to test whether the sales occurred.
- Credit notes issued after year-end, which may indicate returns or invalid sales.
- For the two connected customers, review the sales director's authority limits and any evidence of override.
The refusal to permit re-contact is a scope limitation. If alternative procedures provide sufficient evidence, the matter can be resolved; if not, the partner must consider the effect on the opinion, potentially a qualification over receivables.
2. How should the auditor respond to the client's refusal to allow further customer contact?
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A refusal to permit contact is a management-imposed scope limitation. The auditor should first explain why re-confirmation is needed and document the discussion. If the refusal persists, perform alternative procedures, since positive confirmations are not the only source of evidence: inspect post-year-end cash, delivery notes, contracts and correspondence, and consider contacting the customers independently if the firm's ethical and legal position permits.
If alternative procedures do not provide sufficient appropriate evidence, the auditor cannot obtain sufficient evidence over the affected balances. The effect is material but likely not pervasive (it concerns three balances), so a qualified opinion 'except for' receivables would be appropriate. The matter should be communicated to those charged with governance and considered in the fraud risk assessment. The auditor should also consider whether the refusal itself, combined with the connected-party indicators, suggests management dishonesty and whether withdrawal from the engagement is necessary.