This is a procedure by which the auditor obtains corroborative evidence regarding the existence, ownership and the value of debtors appearing in the financial statements. This is done by writing directly to the debtors and requesting written confirmation to be sent directly to the auditor.

Purposes for Circularisation

  1. To provide independent third party confirmation of the existence of the debt.
  2. To confirm the ownership rights to the amounts owned.
  3. To confirm the money amount.
  4. To provide support to compliance tests as to the functioning of the Internal Control over sales and debtors.
  5. To bring to light any disputed amounts which could point out irregularities or frauds in the area of debtors.
  6. To support other evidence with regard to the effectiveness of the cut-off procedures.

Types of Circularisation

Negative Circularisation

The debtor is expected to respond to the circular if they do not agree with the contents of the circular. The major drawbacks of this method of circularisation is that should the debtor fail to receive the circular and therefore not reply, the auditor may wrongly assume that the debtor is in agreement with the contacts of the circular. Therefore unless the client has a very effective system of internal control or there exists other evidence to enable the auditor satisfy themselves with regard to the purposes of circularisation the negative method should not be used.

Positive Circularisation

The debtor is required to respond to the circular whether they agree or do not agree with the contents of the circular. Accordingly the positive method is the preferred method of circularisation.

The approach for circularisation is as follows:

  1. Obtain the client’s consent to send the requests to the debtors.
  2. Select the date at which you desire to perform the circularisation.
  3. Select the debtors you wish to circularise and confirm management’s acceptance of those debtors.
  4. Draft a circular, which should be from the client to the debtor with the request that the debtor should reply direct to the auditors.
  5. Send reminders to non-repliers.
  6. Evaluate the replies. This involves comparing the amount acknowledged in the reply with what appears in the clients ledger and investigating any differences.
  7. Perform alternative tests to non-repliers.
  8. Conclude on whether the objectives of the debtors circularisation have been achieved.