What is external confirmation in audit?

23.8.1 Use of external confirmations

As stated in 23.2.2, audit evidence is more reliable when it is obtained from independent sources outside the entity. ISA (UK) 505 provides guidance on using external confirmations to provide sufficient appropriate audit evidence at assertion level.

External confirmations are frequently used in connection with account balances and their components, such as debtors’ circularisations, which are discussed in detail in 23.8.2. However, they need not be limited to this and may be used to confirm the terms of agreements or transactions an entity has with third parties. Examples of where external confirmations may be used are:

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SAS No. 38 External Confirmations

Status

Issued by Auditing Standards Committee in Taiwan on 29 October, 2002.

Summary

External confirmation is the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the financial statements or related disclosures.

The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion. In making this determination, the auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptable low level for the applicable financial statement assertions.

The auditor may request external confirmations of the following situations:

  • Bank balances and other information from bankers.
  • Accounts receivable balances.
  • Marketable securities held as collaterals.
  • Refundable deposits.
  • Prepayments.
  • Accounts payable balances.
  • Advance receipts.
  • Mortgage and contingent losses.
  • Total issued and outstanding shares and declared dividend for long-term equity investments
  • Property title deeds held by lawyers or financiers for safe custody or as security.
  • Investments purchased from stockbrokers but not delivered at the balance sheet date.
  • Agreements entered with third parties or trade terms.

The reliability of the audit evidence obtained by external confirmations depends, among other factors, upon the auditor applying appropriate audit procedures in designing the external confirmation request, performing the external confirmation procedures, and evaluating the results of the external confirmation procedures.

The auditor may use positive or negative external confirmation requests or a combination of both.

A positive external confirmation request asks the respondent to reply to the auditor in all cases either by indicating the respondent’s agreement with the given information, or by asking the respondent to fill in information. A response to a positive confirmation request is ordinarily expected to provide reliable audit evidence. There is a risk, however, that a respondent may reply to the confirmation request without verifying that the information is correct.

The auditor is not ordinarily able to detect whether this has occurred. The auditor may reduce this risk, however, by using positive confirmation requests that do not state the amount (or other information) on the confirmation request, but ask the respondent to fill in the amount or furnish other information. On the other hand, use of this type of “blank” confirmation request may result in lower response rates because additional effort is required of the respondents.

The auditor should perform alternative audit procedures where no response is received to a positive external confirmation request. The alternative audit procedures should be such as to provide audit evidence about the assertions that the confirmation request was intended to provide.

A negative external confirmation request asks the respondent to reply only in the event of disagreement with the information provided in the request. However, when no response has been received to a negative confirmation request, the auditor remains aware that there will be no explicit audit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. Accordingly, the use of negative confirmation requests ordinarily provides less reliable audit evidence than the use of positive confirmation requests, and the auditor considers performing other substantive procedures to supplement the use of negative confirmations.

Negative confirmation requests may be used to reduce the risk of material misstatement to an acceptable level when:

  • The assessed risk of material misstatement is lower;
  • A large number of small balances is involved;
  • A substantial number of errors is not expected; and
  • The auditor has no reason to believe that respondents will disregard these requests.

When performing confirmation procedures, the auditor should maintain control over the process of selecting those to whom a request will be sent, the preparation and sending of confirmation requests, and the responses to those requests.

When the auditor forms a conclusion that the confirmation process and alternative audit procedures have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should perform additional audit procedures to obtain sufficient appropriate audit evidence.

The auditor should evaluate whether the results of the external confirmation process, together with the results from any other audit procedures performed, provide sufficient appropriate audit evidence regarding the assertion being audited.

When the auditor uses confirmation as at a date prior to the balance sheet to obtain audit evidence to support an assertion, the auditor obtains sufficient appropriate audit evidence that transactions relevant to the assertion in the intervening period have not been materially misstated.

Effective date

This Statement is effective from 31 December, 2002.

What are the three types of confirmation?

The three types of confirmation forms are positive confirmation, blank confirmation forms, and negative confirmation.

What are the two types of confirmations?

There are two types of confirmations: A positive confirmation requests that the recipient complete a form confirming account balances (for example, how much a customer owes the company). A negative confirmation requests that the recipient respond only if the balance is inaccurate. 2.

What is external documentation in auditing?

Dictionary of Accounting Terms: external document. external document. term applies to documents needed for the company record keeping that has somehow been handled by outside individuals. Vendor invoices and cancelled checks are examples.

What are the examples of external audit evidence?

Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts. Good auditing evidence should be sufficient, reliable, provided from an appropriate source, and relevant to the audit at hand.