ACCA Audit and Assurance (F8) Practice Exam

What is circularisation in the context of auditing?

1. Reviewing internal control processes

2. Confirming balances with customers

3. Updating financial statements

4. Gathering data for sales analysis

The correct answer is: Confirming balances with customers

In the context of auditing, circularisation refers specifically to the process of confirming balances with customers. This is a critical step in the audit process as it helps verify the accuracy and existence of the amounts recorded in the financial statements. By sending confirmation requests to customers, auditors can directly obtain third-party verification of accounts receivable balances. This procedure helps to ensure that the financial records are reliable and provides evidence to support the completeness and accuracy of this area of the accounts. The significance of this practice lies in its ability to address potential misstatements in the financial statements. By securing independent confirmation of outstanding balances, auditors can enhance the credibility of the numbers reflected in the financial records. It also aids in identifying any discrepancies that may raise concerns about the recording of transactions or the overall financial position of the entity being audited.