Statements on Auditing Procedure
Issued by the Committee on Auditing Procedure, American Institute of Accountants, 13 East 41st Street, New York 17, N. Y.
Confirmation of Public Utility Accounts Receivable
Copyright 1942 by American Institute of Accountants
Query: The XYZ Corporation is a utility with a satisfactory system of internal control and has approximately 50,000 residential, com-mercial, rural, industrial, and other customers. Is it practicable and reasonable to communicate directly with these customers as a matter of regular procedure in the examination of its financial statements, and if so, how extensive should the confirmation be?
ON OCTOBER 18, 1939, the special committee on auditing pro-cedure of the American Institute of Accountants recommended that, wherever practicable and reasonable, confirmation of accounts receivable by direct communication with the debtors shall be re-garded as generally accepted auditing procedure in the examination of the accounts of a concern whose financial statements are accom-panied by an independent certified public accountant's report; and that the method, extent and time of confirming receivables in each engagement, and whether of all receivables or a part thereof, be de-termined by the independent certified public accountant as in other phases of procedure requiring the exercise of his judgment.
The aggregate balance of all receivables of utilities usually aver-ages 2 per cent of all assets and about 10 per cent of annual revenues. Accumulations of receivables materially beyond these percentages re-sult from unusual conditions and would invoke inquiry, apart from the question of confirmation. The average account balance for all accounts receivable of utilities seldom averages more than $10 per customer.
In dealing with the specific question, it is desirable to discuss it in relation to the receivables under two general categories, namely: I. The large accounts — Municipal, other utilities, industrial and miscellaneous accounts receivable
II. The "mass" accounts—Residential, commercial, rural and merchandise accounts receivable