What are the two types of confirmation requests explain their difference?

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:

When an auditor is examining the accounting records of a client company, a primary technique for verifying the existence of accounts receivable is to confirm them with the company's customers. The auditor does so with an accounts receivable confirmation. This is a letter signed by a company officer (but mailed by the auditor) to customers selected by the auditors from the company's accounts receivable aging report. The letter requests that customers contact the auditors directly with the total amount of accounts receivable from the company that was on their books as of the date specified in the confirmation letter. The auditor typically selects customers for confirmation that have large outstanding receivable balances, with secondary consideration given to overdue receivables, followed by a random selection of customers having smaller receivable balances.

Since the information obtained through confirmations comes from a third party, it is considered to be of higher quality than any information that an auditor could have obtained from the client company's internal records.

The Difference Between Positive and Negative Confirmations

There are two forms of confirmation, which are noted below.

Positive Confirmation

This is a request to provide a response to the auditor, whether or not the customer agrees with the receivable information listed in the confirmation.

Negative Confirmation

This is a request to contact the auditor only if the customer has an issue with the accounts receivable information contained within the confirmation. This is a less robust form of evidence, since there is an inclination by customers to not contact the auditor, which leads to the presumption by the auditor that customers agree with the presented accounts receivable information.

Alternative Audit Procedures

If customers do not return confirmations to the auditor, the auditor may go to considerable lengths to obtain the confirmations, given the high quality of this form of evidence. If there is no way to obtain a confirmation, then the auditor's next step is to investigate subsequent cash receipts, to see if customers have paid for those invoices that were not confirmed. This is a strong secondary form of evidence that the accounts receivable outstanding at the end of the reporting period being audited were in existence at that time.

Dealing with Confirmation Variances

If the information received from a customer varies from the receivable amount listed in the company's receivable report, the auditor usually asks the company to reconcile the difference, which the auditor can then take further action on, as necessary.

Audit confirmations are used when:

Third-party confirmations received directly by the auditor from external sources are considered more reliable than evidence generated in-house by your company. Auditors often send paper or electronic requests to customers to verify accounts receivable and to other financial institutions to confirm outstanding promissory notes. They also may choose to investigate cash transactions, inventory records, and consigned merchandise as well as long-term contracts, accounts payable and contingent liabilities, and any unusual transactions.

Before finishing audit procedures, a letter is sent to your attorney, confirming whether the information provided about any pending legal actions are both accurate and complete. Your attorney’s response will determine whether any pending litigation will have a material impact on the company’s financial statements.

A few types of confirmations:

Different types of audit confirmations exist for the varied nature of financial situations and the nature of your company’s operations. There are three basic types of confirmations:

1. Positive. This confirmation format asks recipients to reply directly to the auditor and to clarify with a positive statement regardless of whether they agree or disagree with the financial information included.
2. Negative. This type asks recipients to reply directly to the auditor only if they disagree with the information presented on the confirmation.
3. Blank. This type doesn’t state the amount or any other specific details on the request itself. Instead, recipients are asked to complete the form and return it directly to the auditor.

Some banks and financial institutions have chosen to no longer respond to confirmation letters mailed through the USPS. Instead, they respond only to electronic requests. These email requests may be made directly to the respondent or sent through a third-party provider.

Can you do something to assist?

The answer is yes! Approving the auditor’s requests in a quick, efficient manner can speed up the confirmation process. However, there may be situations when you object to the use of confirmation procedures. If this happens, discuss the matter with and provide corroborating evidence to your auditor. If your auditor feels the reason for the refusal is valid, they will apply alternative procedures and possibly ask for exclusive representation with management regarding the reasons for not confirming.

Auditors also might include your staff during the confirmation process. They may ask about recipients who aren’t responding to requests or other discrepancies found during the confirmation process. Your staff can help the audit team determine whether a misstatement in responses has occurred — and adjust the financial reports accordingly.

Audit confirmations can be a powerful tool.

Confirmations can both the quality and efficiency of the audit. JLK Rosenberger works with our clients to ensure the confirmation process goes smoothly. If the experience with your auditor has not been smooth, please call us at 818-334-8645 or click here to contact us. We’d be happy to discuss how our audit process can alleviate some of the burden placed on you and your staff.

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