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Effectiveness of audit confirmations for trade accounts receivable
Abstract
Accounts receivable confirmations are firmly established and widely accepted by the auditing profession. However, the results of this research raise serious questions about the effectiveness of this procedure. This study empirically tested the effectiveness of accounts receivable confirmations sent to individual retail customers, and examined the attitudes of external auditors regarding this procedure. The research consisted of a field study and questionnaire survey. In the field study, correct and intentionally misstated confirmations were sent to a random sample of 500 customers from a manufacturing company. They were equally divided between positives and negatives. Misstatements were either five or 10 percent with equal numbers of overstatements and understatements. A questionnaire was sent to a random sample of 300 members of the AICPA employed as auditors in public accounting. Detection rates for positives ranged from 10 to 52 percent with an overall detection rate of 38 percent. Detection rates for second requests were lower than first requests across all independent variables. Detection rates for negative confirmations ranged from four to 30 percent with an overall detection rate of 16.5 percent. The detection rate for negatives was significantly lower (p $<$.000) than positives using both ANOVA and chi-square analysis. Even though this research indicates that accounts receivable confirmations are not highly effective, auditors rely on them. Substantially all respondents to the questionnaire indicated they regularly use positive and/or negative confirmations. Also, auditors' expectations of the percentage of errors in the account balances that would be detected through confirmations were 20 to 25 percent higher than the actual detection rates from the field study. This result held for both positive and negative confirmations. Based on this research, it appears that auditors rely on accounts receivable confirmations, yet they do not fully realize the level of effectiveness of the procedure and thus may be putting themselves at more risk than they anticipate.
Subject Area
Accounting
Recommended Citation
Armitage, Jack Lonnie, "Effectiveness of audit confirmations for trade accounts receivable" (1988). ETD collection for University of Nebraska-Lincoln. AAI8818606.
https://digitalcommons.unl.edu/dissertations/AAI8818606