ACCA Audit and Assurance (F8) Practice Exam

When should circularisation letters be followed up?

1. Only if the customer agrees with the balance

2. If there is a dispute regarding balances

3. When all customers respond positively

4. Immediately after sending the letters

The correct answer is: If there is a dispute regarding balances

Circularisation letters are an important audit procedure used to confirm the existence and accuracy of account balances, especially for receivables. Following up on these letters is crucial when there is a dispute regarding balances. This indicates that there is a difference between the data recorded by the auditor and that presented by the customer, which could suggest potential misstatements or issues that need further investigation. When discrepancies arise, it is essential for auditors to gather more information, clarify the reasons for the dispute, and understand the underlying causes. This process helps ensure the reliability of the financial statements and aids in assessing the adequacy of internal controls. Failure to follow up on disputed balances could lead to unrecognized risks or errors in financial reporting. In contrast, following up on responses that are all positive may not be necessary, as those do not raise any concerns. Additionally, addressing responses only from customers who agree or acting immediately after sending letters without context fails to prioritize the areas that require deeper inquiry, which is a critical aspect of the audit process. Thus, disputing balances is the right scenario that warrants a follow-up to ensure accurate financial reporting.