SA 505- External Confirmations

Background

An auditor should obtain sufficient appropriate audit evidence in order to give opinion on the true and fair view of financials. Sufficiency and appropriateness of audit evidence shall depend on the assessed level of inherent and control risk of the entity. To assess the level of control risk, we exercise compliance procedures and based on the findings of the compliance procedures and other considerations like materiality, we decide the nature and extent of substantive procedures to be performed. 

As per SA-200 the one of the basic objective of the auditor is “to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework”.

Further SA 200 states that “to obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion”.

External Confirmation is a substantive procedure used to obtain audit evidence. SA-505 deals with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the requirements of SA 330 and SA 500 as audit evidence is more reliable when it is obtained directly by the auditor from independent sources outside the entity in documentary form.

Objective

The aim is to explain the need and procedures of external evidences.

Need for External Confirmation

An auditor responsibility for the audit of the financial statement is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. The auditor identifies and assess the risks of material misstatement of the financial statements, whether due to fraud or error, designs and performs audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for opinion.

External Confirmation is required to obtain such reasonable assurance on the financials of a company. To obtain sufficient and appropriate audit evidence by performing substantive procedures one of the method of collecting audit evidence is the External Confirmation.

Procedure for External Confirmation

The following are the steps involved in obtaining external confirmation:

1. Determining the information to be confirmed
2. Selecting the appropriate parties from whom confirmation is required
3. Designing the confirmation requests, being properly addressed with information for responses to be sent directly to the auditor; and
4. Sending the requests, including follow-up request.

Auditor shouldensure direct communications with the confirming partiesto minimize the possibility that the results of such confirmation process will be biased because of the interception and alteration of confirmation request or responses.

External Confirmation shall be obtained by sending request to third party to confirm the particular matter or amount.

The auditor may give a list of accounts selected for confirmation to the management for preparing requests for confirmations, which should be properly addressed and stamped.The auditor should ensure that it is the auditor who sends out the confirmation requests, and it is requested that all replies and the undelivered confirmations are delivered directly to the auditor.Email confirmation is also a valid confirmation.

Management refusal for external confirmation

If the management refuses to allow auditor to send confirmation request:

1. Inquire management’s reasons for the refusal, and seek audit evidence for validity,
2. Evaluate the implications for such refusal
3. Perform alternative audit procedures

If management refusal is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor shall communicate with those charged with governance.

Results of the External Confirmation Procedures

Ifthe auditor has doubts about reliability of response, he shall obtain further evidences to resolve the doubts.

If the auditor determines that response to confirmation request is not reliable, the auditor shall evaluate the implications on the assessment of the relevant risks of material misstatement, including the risk of fraud, and on the related nature, timing and extent of other audit procedures.

Type of Confirmations

1. Positive confirmation request – A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
2. Negative confirmation request – A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.

Positive Confirmation

When using a confirmation request other than a negative confirmation request, the auditorshould follow up with those parties from whom replies have not been received.

In the case of each non-response to positive confirmation, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence.

Alternative procedure includes examination of subsequent receipts, shipping documents, or other client documentation to provide sufficient evidence.

When response to positive confirmation request is necessary

If the auditor has determined that a response to a positive confirmation request is necessary to obtain sufficient appropriate audit evidence, alternative audit procedures will not provide the audit evidence the auditor requires. If the auditor does not obtain such confirmation, the auditor shall determine the implications for the audit and the auditor’s opinion in accordance with SA 705.

Exceptions

The auditor shall investigate exceptions to determine whether or not they are indicative of misstatements.

Negative Confirmations

Negative confirmations provide less persuasive audit evidence than positive confirmations. Accordingly, the auditor shall not use negative confirmation requests as the sole substantive audit procedure to address an assessed risk of material misstatement at the assertion level unless all of the following are present:

1. Risk of material misstatement is low and internal controls are effective,
2. Population of items subject to negative confirmation procedures comprises a large number of small amounts,
3. A very low exception rate is expected,
4. Noreason to believe that recipient may disregard the request

Results of the External Confirmation Procedures

Afterperforming the procedure of external confirmation and any alternative procedures, the auditor should evaluate the combined evidence provided by the confirmations and the alternative procedures to determine whether sufficient evidence has been obtained about all the applicable financial statement assertions.

Inperforming the evaluation, the auditor should consider the reliability of the confirmations and alternative procedures. ;

1. The nature of any exceptions, including the implications, both quantitative and qualitative, of those exceptions;
2. The evidence provided by other procedures and whether additional evidence is needed.

Ifthecombined evidence provided by the confirmations, alternative procedures, and other procedures is not sufficient, the auditor should request additional confirmations or extend other tests, such as tests of details or analytical procedures.

Reliability of Audit Evidence

Factors that may indicate doubts about the reliability of a response includes, that it:

1. Was received by the auditor indirectly; or
2. Appeared not to come from the originally intended confirming party.

Responses received electronically, for example by facsimile or electronic mail, involve risks as to reliability because proof of origin and authority of the respondent may be difficult to establish, and alterations may be difficult to detect.

If a confirming party uses a third party to coordinate and provide responses to confirmation requests, the auditor should perform procedures to address the risks that:

1. Response may not be from the proper source;
2. A respondent may not be authorised to respond; and
3. The integrity of the transmission may have been compromised.

Conclusion

Obtaining external confirmation may assist the auditor in concluding whether sufficient appropriate audit evidence has been obtained or whether performing further audit procedures is necessary.

Annexure 1

Positive Confirmation Request

Dated:

(Name of the Vendor)

Our auditor’s M/s S. Jaykishan are auditing our Financial Statements and wish to obtain direct confirmation of accounts payable to you as of March 31,20XX. Compare the information below and please confirm whether this agrees with your records on that date by signing and returning this form directly to our auditors. An addressed envelope is enclosed for this purpose. If you find any difference, please report details directly to our auditors in the space provided below.

Or

We M/s S. Jaykishan are auditing our Financial Statements of the ______(name of the Company) and wish to obtain confirmation of accounts payable to you as of March 31,20XX. Compare the information below and pleaseconfirm whether this agrees with your records on that date by replying directly to us over the e-mail. If you find any difference, please report details directly to us in the same mail.

Company’s record as on March 31, 20XX showed as _____ payable to you.

Yours Faithfully,

Address of Auditors

Annexure 2

Negative Confirmation Request

Dated:

(Name of the Vendor) 

Our auditor’s M/s S. Jaykishan are auditing our Financial Statements and wish to obtain direct confirmation of accounts payable to you as of March 31,20XX. Compare the information below and if it does NOT agree with your records, please report the exceptions directly to us.An addressed envelope is enclosed for this purpose. If you find any difference, please report details directly to our auditors in the space provided below.

Or

We M/s S. Jaykishan are auditing our Financial Statements of the ______(name of the Company) and wish to obtain confirmation of accounts payable to you as of March 31,20XX. Compare the information below and if it does NOT agree with your records, please report the exceptions directly over the e-mail. If you find any difference, please report details directly to us in the same mail.

Company’s record as on March 31, 20XX showed as _____ payable to you.

Yours Faithfully,

Address of Auditors

 

By CA Vivek Bagrodia

 

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