- As per Standard of Auditing 505 issued by ICAI,“External Confirmations” are defined asthe audit evidence obtained as a direct written response to the auditor from a third party in paper form or by electronic or other medium.
- External Confirmation can be an effective audit tool for audit of books of accounts and detecting fraud.
- In addition, it is to obtain sufficient appropriate audit evidence, external confirmation of debtor and creditor confirmations assist the auditor in discovering exceptions in the accounts.
- Audit evidence shall be treated more reliable when:
- Obtained from independent source outside the entity.
- Obtained directly than indirectly or by inference.
- When exist in documentary form.
- Procedures for external confirmations
While using external confirmation procedures, there must have a control over external confirmation requests, including:
- Determination of information to be confirmed or requested.
- Selection of confirming party.
- Designing the confirmation requests and ensure that the requests are properly addressed and contain return information for responses to be sent directly to the auditor.
- Taking proper follow-up of sending request when required and applicable.
- Management’s refusal to allow the auditor to send a confirmation request
In most of the time management refuses to allow auditor to send external confirmation. If it happens, then:
- Inquire about the management’s reasons for the refusal and seek alternate audit evidence as to their validity and reasonableness.
- Evaluate the implications of management’s refusal on the auditor’s assessment and relevant risks of material misstatement, including the risk of fraud.
- Perform alternative audit procedures designed to obtained sufficient and appropriate audit evidence alternatively.
- If the auditor has a doubt about the reliability of the response to the confirmation request, the auditor shall obtain further audit evidence to resolve those doubts and consider about all the risk implications of material misstatement for considering this evidence.
- In the case of each non-response, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence.
Types of confirmations:
The types of confirmation can be categorised into two broad headings namely:
- Positive confirmation and
- Negative confirmation
- In a positive confirmation the recipient is requested to reply/ confirm with the stated amount/ information. On the other hand, in a negative confirmation the recipient is requested to reply only when there is any disagreement with the subject.
- In positive confirmation auditor should perform follow up procedures but in the negative confirmation follow is not required. Resultantly, negative confirmation is less expensive than positive confirmation because there is no procedure to follow-up.
- Positive confirmation is more reliable than negative confirmations.
Designing confirmation requests
The designing of a confirmation request directly effects the confirmation response rate, and the reliability and the nature of the audit evidence obtained from responses.
Factors to be considered while designing confirmation request:
- All the assertions being covered.
- Risk of material misstatement should be specifically identified.
- The layout and presentation of confirmation request.
- Mode of communication as per the convenience of sender.
- Management’s authorisation is must for confirming parties to respond to the auditor. Mostly, confirming parties may only be willing to respond to a confirmation request authorised by management.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
CA Aman Aggarwal
AKGVG & Associates