Auditing - Chapter 12 - Audit Evidence: Confirmations

Benefits of using confirmations as audit evidence

1. The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. 2. Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control). 3. Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed).

blind (or blank) confirmation (type of positive confirmation)

A form of audit confirmation in which the auditor askes the third party to fill in the amount owed without providing the account balance according to the client's books.

positive confirmation

A type of external confirmation that asks the third party to return the confirmation form to the auditor whether the stated balance is correct or not, noting any discrepancies.

Negative confirmation

A type of external confirmation that asks the third party to return the confirmation letter only if a discrepancy is noted.

confirmations

Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party).

Cash Balance Confirmation (alternative audit procedures)

Examine bank statements

Accounts Receivable Confirmation (alternative audit procedures)

Examine subsequent cash collections relating to customer balance Examine source documents relating to the sale(s) and creation of the accounts receivable balance (i.e. purchase orders, shipping documents, invoices, etc.)

Accounts Payable Confirmation (alternative audit procedures)

Examine subsequent cash disbursements and compare to receiving reports, invoices received, and other vendor communication to ensure completeness

nonresponse

Failure on the part of the party to whom the confirmation request is sent to respond to the confirmation request.

alternative procedures

Procedures followed to obtain evidence regarding the assertion being tested when a nonresponse occurs.

U.S. standards require auditors to use confirmations when auditing accounts receivable unless one of the following is true

The overall account balance is immaterial, External confirmation procedures would be ineffective, or The auditor's assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.

Describe strategies for managing risks when using external confirmations.

Verify the existence of the third party and the accuracy of recorded contact information Mailing the confirmation request from a location other than the client's mail room Including a self-addressed, stamped envelope to increase the likelihood that confirmation requests are returned directly to the auditor Including a fax number and encouraging respondents to return the confirmation request by both mail and fax, thus minimizing the opportunity for alteration after the third party completes the confirmation request Using a third party electronic confirmation system

Describe the procedures for handling unreturned confirmations.

When a nonresponse occurs, the auditor will typically send a second request, and perhaps a third request seeking a response to a positive confirmation. If the auditor is ultimately unsuccessful at obtaining a response to the confirmation request, auditing standards require the auditor to consider the effect of the nonresponse on the auditor's conclusions regarding the fairness of the account balance. When a nonresponse occurs, the auditor generally performs alternative procedures on the specific items that are the subject matter of the confirmation. (Accounts Receivable, Accounts Payable, or Cash Balance confirmations)