What should I do if I receive a balance confirmation letter?

If there is a supplier who has been audited, a confirmation letter of the balance of accounts receivable (accounts payable for us) (hereinafter referred to simply as “confirmation letter”) may be mailed from that supplier.

You may be surprised when it arrives suddenly, but it’s not too scary if you know what it was sent for and what to do about it.
This time, I will explain about this confirmation letter.

table of contents

  • What is it for?
  • Which account will send the confirmation letter?
  • What kind of confirmation letter?
  • What should I do?
  • Summary

What is it for?

The confirmation letter is sent in the sense that the balances of the accounts that should be recorded with the same recognition as the business partner should be matched with each other on a regular basis such as quarterly or semi-annual.

For example, in a transaction between your company and a supplier, the balance of accounts payable recorded by your company and the balance of accounts receivable recorded by your supplier should basically match. Depending on the timing of each accounting work, the timing of accounting may be slightly different, but if you adjust the timing difference, it will match.

If they do not match, it means that there is some kind of discrepancy in recognition such as omission of transaction accounting or omission of payment confirmation, and if you do not correct it early, you will have trouble later.

In addition, we may send confirmation letters for purposes other than resolving these disagreements.
That is the balance confirmation as an audit procedure. Audits are simply done to ensure that no window dressing has been done. And the most common method of window dressing is overstatement of assets.

For example, by recording more accounts receivable than the actual amount, the counter-account sales are overstated and the results are shown well. The easiest and most reliable way to prevent this is to ask the customer, who is the counterparty to the accounts receivable, what your accounts payable balance is.
Therefore, a confirmation letter is sent to the customer as an audit procedure.

Which account will send the confirmation letter?

Confirmations aren’t just for accounts receivable.
Sending a confirmation letter is a procedure for obtaining a written response from outside the company in the audit procedure, and since it has high proof power and is relatively easy to do, various accounts that can be confirmed by confirming with the other party. This is the procedure used for the subject.
Specifically, in addition to accounts receivable, it is possible to send confirmation letters to the following accounts.

  • deposit
  • bills recivable
  • Loan
  • Inventories stored externally
  • Securities stored externally
  • Borrowing
  • Bills payable
  • Accounts payable
  • Contingent debt
  • Lease receivables / debts

For example, in the case of deposits, by sending a confirmation letter about the deposit balance to the financial institution, and in the case of loans, by sending a confirmation letter about the debt balance to the debtor, the amount recorded by the Company is correct. I know if it is.

 

What kind of confirmation letter?

Sending a confirmation letter is called “confirmation” in an audit, but confirmation is broadly divided into positive confirmation and negative confirmation.
Aggressive confirmation is a confirmation method in which the confirmation destination agrees with the amount and information stated in the confirmation letter, or asks the confirmation destination to fill in the information that the confirmation destination has. In other words, it’s always a way to ask for a confirmation answer.

On the other hand, passive confirmation is a method of requesting a reply only when the confirmation destination does not agree with the amount and information stated in the confirmation letter.
Normally, audits are actively confirmed, so if you do not always reply to a confirmation letter when you receive it, your business partners will endlessly prompt you for a reply.

What should I do?

So what should you do if you actually receive a confirmation letter? In the case of positive confirmation, if you do not answer, the reminder will continue to come, so here we will tell you the specific method of answering.

I think the confirmation letter you received will include the account and its amount. If the amount on the account listed on the confirmation letter matches the amount recognized by your company, please indicate that there is no difference and mail it in the enclosed return envelope.

If the amount does not match the amount recognized by the company, tell them that it is different, and if you know the cause of the difference, such as the difference in bookkeeping timing, the cause and amount can be understood. Will be added and returned.

In either case, it is safer to make a copy and save it.
In addition, if a confirmation letter has been sent as part of the audit procedure (if the audit firm is the sender), we will reply to the audit firm.
If you send it directly to a business partner, it may be tampered with, so the audit procedure will have to be redone. I think that the reply destination of the enclosed reply envelope is an audit corporation, so there is no doubt that you can use it.

Summary

This time, I explained the significance of the balance confirmation letter and what to do if it arrives.
It’s not a routine task, and the sender may be an audit firm, which may surprise you, but I hope you’ll deal with it by referring to this article.

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