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Discuss on the types of circularization during auditing

Discuss on the types of circularization during auditing

Answers

Wilfred
1. Negative circularization
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 circularization 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 satisfies themselves
with regard to the purposes of circularization the negative method should not be used.

2. Positive circularization
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 if the preferred method of circularization.
The approach for circularization is as follows:
i. Obtain the client’s consent to send the requests to the debtors.
ii. Select the date at which you desire to perform the circularization.
iii. Select the debtors you wish to circularize and confirm management’s acceptance of those debtors.
iv. Draft a circular, which should be from the client to the debtor with the request that the debtor should reply direct to the auditors.
v. Send reminders to non-repliers.
vi. Evaluate the replies. This involves comparing the amount acknowledged in the reply
with what appears in the clients’ ledger and investigating any differences.
vii. Perform alternative test to non-repliers.
viii. Conclude on whether the objectives of the debtors’ circularization have been achieved.
Wilfykil answered the question on April 12, 2019 at 06:21

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