Chapter 14 - External confirmation

Question 1

What is External Confirmation?

Answer 1

External Confirmation is a Procedure of obtaining a evidence by Auditor from third party in written form(on paper,in electronic or other medium)

Question 2

Why External confirmation frequently used as evidence in Audit?

Answer 2

Because:
1) It provides highly reliable evidence
2) it provides evidence about Existence,Rights and Obligation,Accuracy,Valuation and Allocation assertion

Question 3

Which assertion does not support External Confirmation and Why?

Answer 3

Completeness does not support external conformation.
Because only recorded amounts selected in confirmation

Question 4

In which cases Auditor may omit external confirmation?

Answer 4

1) When inherent risk and control risk both are
assesed as low, or
2) When total balance is not material, or
When sufficiant appropriate evidence can be
obtained from other substantive procedures,
or
3) When management request Auditor not to
send confirmation request and there is
reasonable justification for this request

Question 5

If Auditor uses External confirmation then what procedures he performs?

Answer 5

1) Decide timing of confirmation (i.e. whether to be used at interim or final date)
2) Obtain list of receivables,and check its accuracy
3) Decide confirming parties (e.g. major parties or where risk is high)
4) Decide the information to be requested (only closing balances or other information)
5) Decide type of confirmation (positive or negative)
6) Obtain signature of Authorized representative (i.e. CFO) and send letter
7) Appropriate procedures should be performed on replies (e.g. if reply is not received or there is dissagrement)
8) Preparation of summary and reaching a conclusion

Question 6

If confirmation is sent at interim date then what procedurs to be performed at year end ?

Answer 6

1) Compare individual balances at year end with balances at interim date , and investigate unusual balances variation
2) For transaction between year end and interim date :
a) Select a sample of transactions, and performs test of controls to ensure operating effectiveness of control
b) Select a sample of material transactions, and performs test of details to ensure that these are not materially misstated.
3) Send confirmation letter also at year end (if necessary)

Question 7

What is positive confirmation request?

Answer 7

it is a request which asks confirming party to reply auditor in all cases whether he agrees or disagrees the information provided in the request.

Question 8

What do you know about risk in positive confirmation? Suggest a way to reduce it.

Answer 8

Risk: if balance to be confirmed is included in the request, confirming party may reply without verification
Way to reduce: Balance to be confirmed should not be included in the request. Confirming party should be asked to fill it himself.

Question 9

In which cases Auditor may omit external confirmation?

Answer 9

1) When inherent risk and control risk both are
assesed as low, or
2) When total balance is not material, or
When sufficiant appropriate evidence can be
obtained from other substantive procedures,
or
3) When management request Auditor not to
send confirmation request and there is
reasonable justification for this request

Question 10

What is negative confirmation request?

Answer 10

A negative confirmation requests ask confirming party to reply to auditor only if he disagrees with the information provided in the request.

Question 11

What is risk in negative confirmation?

Answer 11

1. Negative confirmation is less reliable because there is no evidence that confirming party has received and verified the confirmation.
2. Confirmation may be lost or degraded by the party.

Question 12

What conditions are required to reduce the risk off negative confirmation?

Answer 12

1. relevant population consist of large number of small balances.
2. low inherent and control risks are found and auditor has obtained evidence about operating effectiveness of controls.
3. a very low exception rate is found
4. auditor is not aware of any circumstances that confirming party will disregard such requests.

Question 13

Name some audit procedures after the receipt of replies.

Answer 13

1. a response indicating the agreement.
2. a response indicating disagreement.
3. a non-response of positive confirmation.

Question 14

What would be the procedure if response indicates agreement?

Answer 14

If response indicates agreement, it form sufficient appropriate audit evidence. no further work is required.

Question 15

What would be the procedure if response indicates disagreement/exception?

Answer 15

IF there is disagreement, Auditor shall ask client to reconcile the balances in its records with the balances confirmed by party

Question 16

Why reconciliation should be checked by auditor?

Answer 16

Beacause of :
1) timing differance (cash in transit or goods are in transit
2) misstatements in records of client, or
3) misstatements in records of confirming parties

Question 17

what would be interpretation of reply “this amount was paid on 28 December”?

Answer 17

This indicates timing difference. Auditor should confirm that client received, money after year end.

Question 18

What would be procedure of reply “This amount was paid on 28 December “?

Answer 18

if client received amount before year end, this will be misstatement and money received should be recorded this year

Question 19

What would be interpretation of reply “We received these goods on January 3 “?

Answer 19

This indicates timing difference. Auditor should confirmed that client despatched goods before the year end

Question 20

What would be procedure of reply “ We received these goods on January 3” ?

Answer 20

if client despatched goods after the year end, this would be misstatement and sales recorded should be reversed this year

Question 21

What would be procedure of reply “We have paid this amount since long. OR We have returned thee goods since long. OR We never ordered/received these goods” ?

Answer 21

This indicates misstatements and should be further investigated.
1) If there is weakness in internal control, Control risk should be increased
2) If there is indication of fraud, risk of fraud should be increased

Question 22

What would be procedure of reply “We are unable to confirm amount “ ?

Answer 22

This should be treated same as non response. auditor should perform alternative procedures to obtain evidence

Question 23

If confirmation returned undelivered then what would be procedure of this ?

Answer 23

This indicates either :
1)_ wrong address: in this case confirmation
should be sent again after correcting
address
2) non existence customer: in this case risk of
fraud will increase

Question 24

What would be the procedure of a non response positive confirmation?

Answer 24

Follow-up procedure should be performed (e.g. send another request, or ask client to convince confirming party for response )
If still response is not received, auditor shall perform alternative procedures

Question 25

what are the alternative procedures if a customer/supplier does not reply to positive confirmation?

Answer 25

1) Examine cash received/paid from/to customer/supplier after the balance sheet. Obtain explanation for cash not received/paid within credit period
2) If cash is not received/paid or partly received/paid from customer/supplier, auditor shall inspect customer/supplier signed sales/purchase orders, sales/purchase invoices, goods dispatch/received note, and other documents acknowledged by customer/supplier
3) If any amount is disputed, examine correspondence with debtors, lawyers opinion. appropriateness of provision
4) perform cut-off test by examining sales near balance sheet date
5) compare balances with monthly account statements sent by creditors/debtors (if any)

Question 26

What would be procedures if response is oral?

Answer 26

1) Auditor shall request confirming party to confirm balance in writing because oral res[onse does not meet defination of confirmation
2) if written response is not received, this is same as non response and auditor shall perform alternative procedures to obtain evidence

Question 27

What would be procedures if response is oral?

Answer 27

1) Auditor shall request confirming party to confirm balance in writing because oral res[onse does not meet definition of confirmation
2) if written response is not received, this is same as non response and auditor shall perform alternative procedures to obtain evidence

Question 28

What course of action auditor should do if response received indirectly?

Answer 28

Auditor shall request confirming party to confirm balances directly as indirect response does not meet definition of confirmation

Question 29

What procedures should be performed if response received electronically?

Answer 29

Auditor shall obtain evidence:
Source Authentication
Communication process is secured and controlled (e.g. by use of encryption, digital signature

Question 30

What procedures auditor should perform if there is no response in case of confirmation letter send to banks?

Answer 30

There are no alternative procedure in this case because it is scope limitation in audit

Question 31

If management refuses auditor to send confirmation request to a party and there is reasonable justification, then what procedures auditor should perform?

Answer 31

Auditor shall try to perform alternative procedures to obtain evidence

Question 32

If management refuses to allow auditor to send confirmation request to a party and there is reasonable justification for this and auditor is unable to obtain evidence then what should auditor do?

Answer 32

It will be a scope limitation.
auditor shall express qualified opinion (if effect is material) or disclaimer of opinion (if effect is pervasive)

Question 33

If refusal of management to allow auditor to send confirmation request to a party is not reasonable then what should auditor do?

Answer 33

Auditor should discuss with TCWG and request to allow to send confirmation request to a party. If auditor is still not permitted, it will effect audit as follows:
1) implications on auditors report.
2) other implications on audit

Question 34

What are the implications on auditors report after discussing the issue with TCWG and still not permitted to send confirmation request to a party?

Answer 34

It will be a scope limitation imposed on auditor by management. Auditor shall express qualified opinion (if effect is material) or disclaimer of opinion (if effect is pervasive)

Question 35

What are the other implications on audit after discussing the issue with TCWG and still not permitted to send confirmation request to a party?

Answer 35

1) Auditor shall re-evaluate integrity of management and shall consequently revise risk of material misstatements (including risk of fraud ) and shall also modify nature, timing and extent of audit procedures
2) If auditor has serious concerns about integrity of management, he may also consider withdrawal from engagement