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External Confirmations

Introduction

Scope of this SA
This Standard on Auditing (SA) deals with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the requirements of SA 3301 and SA 5002. It does not address inquiries regarding litigation and claims. SA 5013 deals with obtaining sufficient appropriate audit evidence from such inquiries.
External Confirmation Procedures to Obtain Audit Evidence
  1. SA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained4. That SA also includes the following generalisations applicable to audit evidence 5:
    • Audit evidence is more reliable when it is obtained from independent sources outside the entity.
    • Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.
    • Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other medium.

Accordingly, depending on the circumstances of the audit, audit evidence in the form of external confirmations received directly by the auditor from confirming parties may be more reliable than evidence generated internally by the entity. This SA is intended to assist the auditor in designing and performing external confirmations procedures to obtain relevant and reliable audit evidence.

  1. Other SAs recognise the importance of external confirmations as audit evidence, for example:
    • SA 330 discusses the auditor’s responsibility to design and implement overall responses to address the assessed risks of material misstatement at the financial statement level, and to design and perform further audit procedures whose nature, timing and extent are based on, and are responsive to, the assessed risks of material misstatement at the assertion level6. In addition, SA 330 requires that, irrespective of the assessed risks

1 SA 330, “The Auditor’s Responses to Assessed Risks”.

2 SA 500, “Audit Evidence”.

3 SA 501, “Audit Evidence—Specific Considerations for Selected Items”.

4 SA 500, paragraph A5.

5 SA 500, paragraph A31.

6 SA 330, paragraphs 5-6.

of material misstatement, the auditor designs and performs substantive procedures for each material class of transactions, account balance, and disclosure. The auditor is also required to consider whether external confirmation procedures are to be performed as substantive audit procedures7.

  • SA 330 requires that the auditor obtain more persuasive audit evidence the higher the auditor’s assessment of risk8. To do this, the auditor may increase the quantity of the evidence or obtain evidence that is more relevant or reliable, or both. For example, the auditor may place more emphasis on obtaining evidence directly from third parties or obtaining corroborating evidence from a number of independent sources. SA 330 also indicates that external confirmation procedures may assist the auditor in obtaining audit evidence with the high level of reliability that the auditor requires to respond to significant risks of material misstatement, whether due to fraud or error9.
  • SA 240 indicates that the auditor may design confirmation requests to obtain additional corroborative information as a response to address the assessed risks of material misstatement, whether due to fraud at the assertion level10.

SA 500 indicates that corroborating information obtained from a source independent of the entity, such as external confirmations, may increase the assurance the auditor obtains from evidence existing within the accounting records or from the representations made by the management11.

Effective Date
This SA is effective for audit of financial statements for period beginning on or after April 1, 2010.
Objective
The objective of the auditor, when using external confirmation procedures, is to design and perform such procedures to obtain relevant and reliable audit evidence.
Definitions
  1. For purposes of the SAs, the following terms have the meanings

7 SA 330, paragraph 18 and 19.

8 SA 330, paragraph 7(b).

9 SA 330, paragraph A53.

10 SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, paragraph A37.

11 SA 500, paragraph A8.

Handbook of Auditing Pronouncements-I.A

attributed below:

  1. External confirmation – Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
  2. 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.
  3. 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.
  4. Non-response – A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.

Exception – A response that indicates a difference between information requested to be confirmed, or contained in the entity’s records, and information provided by the confirming party.

Requirements
External Confirmation Procedures
  1. When using external confirmation procedures, the auditor shall maintain control over external confirmation requests, including:
  1. Determining the information to be confirmed or requested; (Ref: Para. A1)
  2. Selecting the appropriate confirming party; (Ref: Para. A2)
  3. Designing the confirmation requests, including determining that requests are properly addressed and contain return information for responses to be sent directly to the auditor; and (Ref: Para. A3-A6)
  4. Sending the requests, including follow-up requests when applicable, to the confirming party. (Ref: Para. A7)
Management’s Refusal to Allow the Auditor to Send a Confirmation Request
  1. If management refuses to allow the auditor to send a confirmation request, the auditor shall:
  1. Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and reasonableness; (Ref: Para. A8)
  1. Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and (Ref: Para. A9)
  2. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence. (Ref: Para. A10)
If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request 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 in accordance with SA 260(Revised)12. The auditor also shall determine the implications for the audit and the auditor’s opinion in accordance with SA 705(Revised)13.
Results of the External Confirmation Procedures
Reliability of Responses to Confirmation Requests
  1. If the auditor identifies factors that give rise to doubts about the reliability of the response to a confirmation request, the auditor shall obtain further audit evidence to resolve those doubts. (Ref: Para. A11-A16)
  2. If the auditor determines that a response to a 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. (Ref: Para. A17)
Non-Responses
  1. In the case of each non-response, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence. (Ref: Para A18- A19)
When a Response to a Positive Confirmation Request is Necessary to Obtain Sufficient Appropriate Audit Evidence
  1. 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(Revised). (Ref: Para A20)

 

12 SA 260(Revised), “Communication with Those Charged with Governance”, paragraph 16.

13 SA 705(Revised), “Modifications to the Opinion in the Independent Auditor’s Report”.

Handbook of Auditing Pronouncements-I.A

Exceptions

  1. The auditor shall investigate exceptions to determine whether or not they are indicative of misstatements. (Ref: Para. A21-A22)
Negative Confirmations
  1. 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: (Ref: Para. A23)
  1. The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion;
  2. The population of items subject to negative confirmation procedures comprises a large number of small, homogeneous, account balances, transactions or conditions;
  3. A very low exception rate is expected; and
  4. The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests.
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