14. External Confirmation

Question 1

Define External confirmation and give examples of situations where it can be used?

Answer 1

External confirmation is a procedure of obtaining evidence by auditor directly from a third party in written form.
Example:
Usually, confirmation procedure is used to confirm information from Debtors, Creditors, Banks, Lawyers, Third parties holding inventory and investments held by brokers.

Question 2

Explain External confirmation as evidence?

Answer 2

It is frequently used in audits because it provides highly reliable evidence being written, external and direct evidence.
It can also provide evidence about the following assertions:
Existence, rights and obligations, accuracy, valuation and allocation.

Question 3

When to omit external confirmation?

Answer 3

1. when inherent risk and control risk both are assessed low
2. when total balance is not material
3. when sufficient appropriate evidence can be obtained from substantive procedures
4. when management requests the auditor not to send a confirmation request.

Question 4

What procedures to perform when using external confirmation?

Answer 4

1. Decide timing of confirmation
2. Decide appropriate confirming parties
3. Decide the information to be requested.
4. Decide type of confirmation
5. Obtain sign of authorized representative
6. Appropriate procedures to be performed on replies
7. Summary

Question 5

What will be the procedures to be performed at year end if confirmation is sent at interim date?

Answer 5

1. compare individual balances at year end with balances at interim date
   and investigate unusual variations
2. Performance of test of controls or test of details
3. Send confirmation letter.

Question 6

Define positive and negative confirmation request?

Answer 6

Positive: It asks the confirming party to reply to auditor in all cases whether he agrees or disagrees.
Negative: It asks to reply only when they disagree with the information provided in the request.

Question 7

What is risk in positive confirmation?

Answer 7

1. If balance to be confirmed is included in request, confirming party may reply without verification.
2. To reduce this risk, balance is not included in the request. Confirming party is asked to fill it themselves.

Question 8

What is risk in negative confirmation?

Answer 8

It is less reliable because there is no explicit evidence that confirming party received and verified confirmation. It may be lost or disregarded.
It can be only used when all of the following confirmations are met:
1. Population consists of large number of small balances.
2. Inherent risk and control risks are low.
3. A very low exception rate is expected.

Question 9

What does a response indicating exception show?

Answer 9

If there is a disagreement, auditor shall ask the client to reconcile the balances in its records with the balances confirmed by the parties.
Reconciliation prepared by client should be checked by auditor to determine whether this exception is because of:
Timing difference,
Misstatement in record of:
Client or confirming party.

Question 10

What to do when response received is oral?

Answer 10

Auditor shall request the confirming party to confirm balance in writing because oral response does not meet the definition of confirmation letter.
If it is not received, this is same as non-response and auditor shall perform alternative procedures.

Question 11

What to do when response is received indirectly and electronically?

Answer 11

Indirectly: Auditor shall request the confirming party to confirm balance directly because indirect response does not meet definition of confirmation letter.
Electronically: Auditor shall obtain whether:
Source is authentic
Communication process is secured and controlled.

Question 12

If management refuses to allow the auditor to send confirmation letter, what to do when refusal is reasonable?

Answer 12

Auditor shall try to perform alternative procedures. If auditor is unable to obtain evidence, it will be scope limitation. Auditor shall expressed Qualified opinion or Disclaimer of Opinion.

Question 13

If management refuses to allow the auditor to send confirmation letter, what to do when refusal is not reasonable?

Answer 13

Discuss the issue with TCWG and request to allow to send confirmation letter. If still not permitted, it will affect audit:
Implications based on auditor’s report: It will be scope limitation imposed by management.
Other implications: Auditor shall re-evaluate the integrity of management and shall revise risk of material misstatement.

Question 14

What is confirmed by the auditor in bank and legal confirmation letter?

Answer 14

BANK:
1. Information regarding bank accounts
2. Information regarding overdrafts/loans
3. Regarding contingent liabilities
4. Additional information
LEGAL:
1. List of litigation and claims pending against the company
2. Assessment of outcome of litigations and claims
3. Estimate of financial implications

Question 15

What does Information regarding bank accounts and overdrafts include in a bank confirmation letter?

Answer 15

Regarding bank accounts:
1. Full title and account number of all bank accounts
2. For all accounts closed during the period, full titles and date of closure.
3. Separate amounts of interest credited or charged
4. Details of unpaid interest
5. If there is a restriction, then nature of that.
Regarding Overdrafts:
1. Details of loans and overdraft
2. Details of any asset held as security by bank
3. Terms of interest