Confirmation techniques play a crucial role in validating audit evidence across various audit areas and scenarios. By employing these techniques, auditors can enhance the reliability and credibility of their findings. In this section, we will delve into the application of confirmation examples and explore how they can be utilized effectively. Confirmation provides direct evidence from an independent and knowledgeable source, which enhances the credibility and reliability of the audit evidence. Confirmation can also corroborate or contradict other audit evidence obtained by the auditor, such as inquiries, observations, inspections, and analytical procedures.
Relationship of Confirmation Procedures to the Auditor’s Assessment of Audit Risk
- Depending on the auditor’s detection risk, the auditor may need confirmation from hundreds of customers, and it can be more efficient to use negative confirmations to collect audit evidence in such a manner.
- This minimizes the burden on the respondents and increases the likelihood of receiving meaningful feedback.
- This consideration can help mitigate non-responses and improve cooperation from third parties.
- If inaccurate, the debtor must produce a reason for the discrepancy and update the account balance.
- Blank confirmations are particularly useful in situations where the auditor suspects that the client may have manipulated figures or when the account in question is complex and requires detailed verification.
Included in the sequence is the auditor’s receipt of theconfirmation response and subsequent evaluation of the informationprovided. When it comes to accounts receivable audits, confirmation techniques are instrumental in validating the amounts owed to the company by its customers. Auditors may send confirmation requests to customers to confirm the outstanding balances and terms of payment.
However, the downside is that negative confirmations provide less direct evidence compared to positive confirmations, as they depend on the recipient’s initiative to report discrepancies. Transaction confirmation requests aim to verify the occurrence and accuracy of specific transactions. Auditors use this type of request to confirm details such as the date, amount, and nature of transactions recorded in the financial statements. For example, an auditor might send a negative confirmation request to a vendor, asking them to respond only if the details of a particular purchase transaction are incorrect. This approach is useful in situations where the volume of transactions is high, but the individual amounts are relatively small.
Negative confirmation is an audit procedure where an auditor sends a letter to a client’s customers asking them to respond only if they disagree with the balance shown on the statement. The purpose of a negative confirmation request is to verify the accuracy of the accounts receivable recorded on a client’s financial statements. By carefully considering these factors, auditors can select the most appropriate confirmation method to obtain sufficient and appropriate audit evidence. Confirmation is one of the most important and widely used audit procedures to obtain relevant and reliable audit evidence. However, confirmation can also be challenging and time-consuming, especially when dealing with large volumes of transactions, complex accounting issues, or unresponsive third parties.
We will also discuss the advantages and disadvantages of each type of confirmation and provide some examples of their use in practice. Negative confirmation requests are most effective in environments where the risk of material misstatement is low and the internal controls are robust. These conditions ensure that the absence of a response can be reasonably interpreted as an affirmation of the information provided. In the context of public company audits, the Public Company Accounting Oversight Board (PCAOB) has established standards that address the use of negative confirmations. PCAOB Auditing Standard No. 2310, “The Confirmation Process,” provides detailed guidance on the design and implementation of confirmation requests, including negative confirmations. The standard underscores the importance of considering the nature of the information being confirmed and the reliability of the respondents.
When to Use a Negative Confirmation
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- In an inventory audit, auditors may send confirmation requests to suppliers to confirm the quantities and valuations of inventory items held by the company.
- When developing theconfirmation, the auditor considers which specific assertions theevidence from the form will address.
- It is measurably less expensive to distribute negative confirmations instead of positive confirmations, and therefore, more can be distributed for the same total cost.
- They are often employed when the risk of material misstatement is high or when the auditor doubts the reliability of the client’s records.
This assumption can be problematic if recipients do not thoroughly review the information or fail to respond due to oversight. Therefore, auditors must carefully assess the appropriateness of using negative confirmations, considering factors such as the nature of the account and the reliability of the recipient’s internal controls. Positive confirmations require the recipient to respond regardless of agreement with the information presented. This type is particularly useful when the auditor seeks a high level of assurance about specific account balances or transactions. By necessitating a response, positive confirmations reduce the risk of overlooked discrepancies, as any non-response can indicate potential issues that warrant further investigation.
The negative confirmation letter would state that if the $6 million figure was accurate, there’s no need to reply. However, if the revenue amount were only $5 million, the manufacturer would need to notify the accountant of the discrepancy in the dealership’s books. The intent of this automatically increasing savings rate is to help people save more money for retirement.
Auditors’ Assumptions Underlying Confirmations
It guides auditors in determining the nature, timing, and extent of procedures necessary to gather evidence that supports their opinion on financial statements. The standard underscores professional skepticism, urging auditors to critically assess the evidence obtained and remain alert to any indications of potential misstatements. A negative confirmation is a document issued by an auditor to the customers of a client company. The letter asks the customers to respond to the auditor only if they find a discrepancy between their records and the information about the client company’s financial records that are supplied by the auditor.
The SAS provideshelpful suggestions on developing and sending the confirmation form,performing alternative procedures, and evaluating the results. Perhapsmost importantly, SAS 67 ties the confirmation process to theprofession’s audit risk model and to detection risk specifically. Byfollowing the suggestions in SAS 67, the practitioner can useconfirmations to perform an efficient and effective audit.
When a client’s system of internal controls is considered to be relatively weak, it is more common for the auditor to issue positive confirmations, where the auditor asks recipients to respond to the mailed request. From the perspective of financial audits, confirmation techniques are commonly used to verify the accuracy of financial statement balances. For instance, auditors may send confirmation requests to banks to validate the existence and accuracy of cash balances.
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As the auditor’s combined assessment of inherent and controlrisk increases, the planned level of detection risk decreases and theneed for more reliable evidence increases. Confirmations often providereliable audit evidence because the auditor receives them directly fromthird parties. Confirmations may be used alone or, if additionalassurance is required, can be combined with other substantiveprocedures. As the assessed level of inherent and control riskdecreases, the need for assurance from substantive tests drops. Theauditor may then choose to change from more effective but costlyprocedures, such as confirmations, to less effective, less costlyprocedures. Navigating non-responses and exceptions is a complex yet inevitable part of the audit confirmation process.
For example, negative external confirmation may be more efficient than positive external confirmation for accounts with a large number of small balances and a low expected error rate. Confirmation can help the auditor to detect errors or frauds that may not be easily identified by other audit procedures. For example, confirmation can reveal fictitious or overstated accounts receivable, unauthorized transactions, unrecorded liabilities, or undisclosed related party transactions. Negative confirmation requests are most suitable when dealing with a large number of relatively small items. This is because the administrative burden of responding to each request would be impractical for both the auditor and the respondent. In such cases, the absence of a response can be a reasonable indicator of accuracy, allowing auditors to focus their efforts on investigating any discrepancies that are reported.
From the perspective of auditors, confirmation standards provide a framework for obtaining reliable and relevant information from third parties. This information serves as independent evidence to support the assertions made by the auditee. By obtaining confirmations, auditors can enhance the credibility and reliability of the audit findings. Once the target accounts or transactions are identified, auditors need to design the confirmation requests carefully. The wording of the request should be clear and concise, specifying that a response is only required if the recipient disagrees with the information provided. This minimizes the burden on the respondents and increases the likelihood of receiving meaningful feedback.
Negative Confirmation: Definition, Example and How Does It Work?
Confirmation is a process of obtaining and evaluating audit evidence from a third party in response to a request from the auditor. Confirmation can provide reliable and relevant evidence that supports the auditor’s assertions about the financial statements. However, not all confirmations are equally effective or appropriate for different audit objectives. In this section, we will explore the different types of confirmation and how they affect the quality and quantity of audit evidence.
This may require further investigation, including follow-up inquiries with the respondent or the client, to gather additional information or clarification. In some cases, inconsistencies might arise from misunderstandings or clerical errors, which can be resolved through open communication and verification. However, more significant discrepancies could signal deeper issues that necessitate a reevaluation of the audit strategy or the client’s internal controls.
Practical Usage of Negative Confirmations
However, they can be more challenging to administer, as they demand more effort from the recipient, which may lead to lower response rates. negative confirmation Auditors must weigh the benefits of the increased assurance provided by blank confirmations against the potential for reduced participation and the additional time required to follow up on non-responses. AS 1105 requires auditors to evaluate the sufficiency of evidence by considering its relevance and reliability in relation to specific audit objectives.
Auditors often face the challenge of verifying financial information efficiently and accurately. One tool at their disposal is the negative confirmation request, a method that can streamline the audit process while still ensuring reliability. When using confirmation requests other than the negative form, the auditor should generally follow up with a second and sometimes a third request to those parties from whom replies have not been received. Positive forms typically request the recipient toindicate whether the information provided is correct. Blank forms (atype of positive confirmation) request that the recipient furnishescertain data. Negative confirmations request a response only if theinformation on the form is inaccurate.
