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Audit > Chapter 14 External Confirmation ISA 505 > Flashcards

Chapter 14 External Confirmation ISA 505 Flashcards

1
Q

1.

Define External Confirmation?

[Chapter 14]

A

External confirmation is a procedure of obtaining evidence by auditor directly from a third party in written form (on paper, electronic or other medium).

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2
Q

Give examples of some areas where external confirmation is used?

[Chapter 14]

A
  • Debtors, Creditors (sample basis)
  • Banks, Lawyers (100%)
  • Third parties holding inventory, investments held by brokers.
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3
Q

Under what circumstances, confirmation is NOT used?

[Chapter 14]

A
  • Risk is low, or
  • Balance is immaterial, or
  • Evidence obtained from other procedures, or
  • Management requests.
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4
Q

What is the reliability of evidence obtained through External Confirmation?

[Chapter 14]

A

Confirmation provides highly reliable evidence (being written, external and direct evidence).

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5
Q

What assertions are satisfied by external confirmation?

[Chapter 14]

A

Confirmation provides evidence about:

  • Existence,
  • Rights and Obligation,
  • Accuracy, Valuation and allocation assertions.

Confirmation does NOT provide evidence about:

  • Completeness
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6
Q

List steps involved in the process of Circularization.

[Chapter 14]

A
  • Decide timing.
  • Decide parties
  • Decide information
  • Decide Type (positive or negative)
  • Obtain signature
  • Send letters.
  • Perform procedures on the basis of replies.
  • Preparate summary and conclusion
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7
Q

Which further procedures are performed if confirmation is sent at interim date?

[Chapter 14]

A
  1. Compare balances.
  2. Select a sample of transactions after interim date, and perform:
    * tests of controls, and
    * tests of details.
  3. Send confirmation letter again (if necessary).
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8
Q

What are different types of confirmations sent to debtors?

[Chapter 14]

A
  1. Positive Confirmation Request.
    * Method 1: Balance included
    * Method 2: Balance NOT included
  2. Negative Confirmation Request
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9
Q

What is a Positive Confirmation Request?

[Chapter 14]

A

Confirming party is asked to reply auditor in all cases whether he agrees or disagrees.

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10
Q

What is a Negative Confirmation Request?

[Chapter 14]

A

Confirming party is asked to reply auditor in case of disagreement only.

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11
Q

What is the risk in Positive Confirmation Request? How it can be reduced?

[Chapter 14]

A

Risk: Confirming party may reply without verification.

How to reduce: Use Method 2 Confirmation (i.e. Blank Confirmation without balance)

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12
Q

What is the risk in Negative Confirmation Request? How it can be reduced?

[Chapter 14]

A

Risk: Less reliable, no explicit evidence, confirmation may be lost or disregarded.

How to reduce: Use only when 4 conditions are met.

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13
Q

Which conditions must be satisfied to use Negative Confirmation?

[Chapter 14]

A
  1. Large number of small balances.
  2. Risk is low, and auditor tested controls.
  3. Very low exception rate is expected, and
  4. Confirmation party will not disregard request.
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14
Q

What procedures should be performed by auditor if reply to confirmation indicates agreement?

[Chapter 14]

A

No further work is required.

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15
Q

What procedures should be performed by auditor if reply to confirmation indicates disagreement?

[Chapter 14]

A
  1. Ask client to reconcile.
  2. Check whether exception is because of:
    * timing difference (i.e. cash in transit or goods are in transit), or
    * misstatement in records of client, or
    * misstatements in record of confirming party.
  3. Increase risk, if there is indication of weakness in internal control or fraud.
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16
Q

What procedures should be performed by auditor if positive confirmation to debtors is sent but NO reply is received?

[Chapter 14]

A
  1. Examine cash received after year end.
  2. Examine sales orders, sales invoices, Goods Dispatch Notes and acknowledgement by customer.
  3. If any amount is disputed, examine correspondence with debtor, lawyer’s opinion, appropriateness of provision.
  4. Perform cut-off test on sales.
  5. Examine account statement.
17
Q

What procedures should be performed by auditor if positive confirmation to creditors is sent but NO reply is received?

[Chapter 14]

A
  1. Examine cash paid after year end.
  2. Examine purchase orders, supplier’s invoices, Goods Receipt Notes.
  3. Perform cut-off test on purchases.
  4. Examine account statement
18
Q

What procedures should be performed by auditor if confirming party responds in oral form (e.g. through telephone)?

[Chapter 14]

A

Request to confirm in writing.
If written not received, it will be non-response.

19
Q

What procedures should be performed by auditor if confirming party responds indirectly (via Management)?

[Chapter 14]

A

Request to confirm in writing.
If written not received, it will be non-response.

20
Q

What procedures should be performed by auditor if confirming party responds indirectly (e.g. email or fax)?

[Chapter 14]

A

Check that:

  • source is authentic.
  • communication process is secured e.g. by use of encryption, digital signature.
21
Q

What should auditor do if management requests auditor NOT to send confirmation to a debtor/creditor?

[Chapter 14]

A
  1. Auditor shall inquire reason.
  2. Auditor shall validate reason.
22
Q

What procedures should be performed by auditor if management’s refusal to send confirmation to a debtor/creditor is Reasonable?

[Chapter 14]

A
  1. Perform alternative audit procedures.
  2. If no evidence from alternative procedures, it is scope limitation.
  3. Qualified opinion (if effect is material) or Disclaimer of opinion (if effect is pervasive).
23
Q

What procedures should be performed by auditor if management’s refusal to send confirmation to a debtor/creditor is NOT Reasonable?

[Chapter 14]

A
  1. Discuss with TCWG.
  2. If still not permitted, it is scope limitation.
  3. Qualified opinion (if effect is material) or Disclaimer of opinion (if effect is pervasive).
  4. Other Implications:
    * Re-evaluate integrity of management.
    * Revise risk and procedures.
    * Withdrawal, if serious concerns.
24
Q

What information is included by auditor in a typical Bank Confirmation Letter?

[Chapter 14]

A

a. Information regarding bank accounts:

  1. Title and account number of bank accounts (including closed).
  2. Interest credited/charged (paid, unpaid)
  3. restrictions.

b. Information regarding overdrafts/loans:

  1. Balances of overdrafts and loans.
  2. Security
  3. Interest/Markup.
  4. Repayment Schedule.
  5. Debt-covenants

c. Contingent liabilities:

d. Additional Information:

25
Q

What information is included by auditor in a typical Legal Confirmation Letter?

[Chapter 14]

A
  1. List of cases pending against company.
  2. Expected outcome.
  3. Estimate of the financial implications.

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