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SA 505- External Confirmations


An auditor should obtain sufficient and appropriate audit evidence to form an opinion on financials’ accurate and fair view. The sufficiency and aptness 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. 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, one of the primary aims of the auditor is “to acquire reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, therefore enabling the auditor to express an opinion on financial statements that are prepared following an applicable financial reporting structure.”

Further, SA 200 states that “to acquire reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to minimize audit threat to a tolerably low level and thereby allow the auditor to draw reasonable conclusions on which to base the auditor’s view.”

External confirmation is a substantive method used to acquire audit confirmation. SA-505 deals with the auditor’s use of external confirmation method to acquire audit evidence according to the requirements of SA 330 and SA 500 as audit evidence is more dependable when acquired directly by the auditor from independent sources outside the entity in the documentary form.

Need for external confirmation
An auditor’s responsibility for the audit of the financial statements is to acquire reasonable assurance about whether the financial statements as a whole are at liberty from material misstatement, whether due to cheating or inaccuracy. The auditor identifies and evaluates the risks of material misstatement of the financial statements, whether due to fraud or mistake, designs and perform audit procedures responsive to those risks and acquire audit confirmation that is sufficient and appropriate to provide a ground for an opinion. External confirmation is one of the methods of collecting sufficient and appropriate audit evidence by performing substantive audit procedures.

Procedure for external confirmation
The following are the steps intricated in acquiring external confirmation:

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

External confirmation shall be obtained by sending a request to the third party to confirm the particular matter or amount. The auditor may give a list of accounts selected for confirmation to the management to prepare confirmations requests, which should be adequately addressed and stamped.

The auditor should ensure that the auditor sends out the confirmation requests and that all replies and the undelivered confirmations are delivered directly to the auditor. E-mail confirmation is also a valid confirmation.

Management refusal for external confirmation

  1. If the management doesn’t allow the auditor to send a confirmation letter request, the auditor should
    examine management’s reasons for the refusal and seek audit evidence for validity
  2. Assess the implications for such refusal
  3. Perform alternative audit procedures

If management refusal is unreasonable, or the auditor cannot acquire relevant and dependable audit confirmation from alternative audit procedures, the auditor shall communicate with those charged with governance.

Results of the external confirmation procedures
If the auditor has doubts about the reliability of the response, he shall obtain further evidence to resolve the doubts. For example, suppose the auditor determines that response to confirmation request is not reliable. In that case, the auditor shall evaluate the implications on assessing the relevant risks of material misstatement, including the risk of fraud and the related nature, timing, and extent of other audit procedures.

Type of confirmations

Positive confirmation request
A request that the confirming party responds directly to the auditor stipulates whether the confirming party agrees or disagrees with the request’s details or provides the requested information.
Negative confirmation request
A request that the confirming party responds directly to the auditor only if the confirming party disagrees with the data provided in the request and doesn’t agree with the balances stated in the confirmation letter.

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

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