EXTERNAL CONFIRMATION

Question 1

DEFINE EXTERNAL CONFIRMATION ?

Answer 1

External confirmation is a audit procedure of obtaining evidence by auditor DIRECTLY from THIRD party in WRITTEN form (on paper, electronic medium(in written ,and other medium)

Question 2

EXAMPLES WHERE EXTERNAL CONFIRMATION IS USED??

Answer 2

USUALLY, Auditor uses EXTERNAL CONFIRMATION to CONFIRM balances from DEBTORS,CREDITORS,LAWYERS,BANKS,INVENTORY HELD BY THIRD PARTY,INVESTMENT HELD BY INVESTORS.

Question 3

EXTERNAL CONFIRMATION AS EVIDENCE ?

Answer 3

External Confirmation is frequently used in an audit because
1.It provides highly reliable evidence(being WRITTEN ,DIRECT,EXTERNAL EVIDENCE ).
2.IT provides evidence about Existence ,Rights&Obligation,Cutoff,Accuracy,valuation&allocation.
however,
01.External Confirmation is less reliable evidence to ensure Completeness because only recorded amounts are selected in Confirmation.
02.Many parties either do not respond to the confirmation OR respond without due verification.

Question 4

WHETHER OR NOT TO USE EXTERNAL CONFIRMATION IN OBTAINING AUDIT EVIDENCE ?

Answer 4

AUDITOR may OMIT external confirmation in following cases.
01.When Inherent Risk & Control Risk ,Both are assessed as LOW.
02.When balance to be confirmed is IMMATERIAL.
03.When SAAE can be obtained from other SUBSTANTIVE AUDIT PROCEDURES.
04.When Management requests auditor NOT to send confirmation IF there is reasonable justification for that.

Question 5

On which basis confirmation is sent??

Answer 5

Debtors and Creditors & others are CIRCULARIZED ON SAMPLE BASIS(in this case if repy is not received,Auditor shall perform ALTERNATIVE AUDIT PROCEDURES)
,while
Banks and Lawyers are circularized 100% (In thiscase, Auditor CANNOT perform Alternative Audit Procedures ).

Question 6

AUDIT PROCEDURES WHEN USING/DESIGNING/PLANING CONFIRMATION REQUESTS ?

Answer 6

IF AUDITOR DECIDES TO USE EXTERNAL CONFIRMATION,HE PERFORMS FOLLOWING PROCEDURES.
01.Decides timing of confirmation (Whether at INTERIM DATE or FINAL DATE ).
02.Decide appropriate confirming parties(Major parties(amount high ho).OR where RISK is HIGH)
03.Decide information to be reuested (ononly closing balance or Other Information).
04.Decide type of confirmation (Whether positive OR negative)
05.Obtain signature of authourized Representative(CFO) and send letters.
06.Appropriate procedures should be performed on replies(e.g If repy is not received OR There is a Disaggrement).
07.Preparation of summary And reaching a CONCLUSION.

Question 7

ADDITIONAL AUDIT PROCEDURES TO BE PERFORMED AT YEAR END,IF CONFIRMATION IS SEND AT INTERIM DATE.??

Answer 7

IF Confirmation is send at Interim Date, following Additional Procedures are performed:
01.Compare individual balances at year end with the balances at Interim date,and investigate unsual variations.
02.For transactions(sale and receipts in case of debtors) b/W Interim date & Final date.
a. Select a sample of transactions and Perform test of controls to ensure effectiveness of control.
b.Select a sample of material transaction,perform Test of details with supporting documents to ensure that these are not materially misstated.
03.Send confirmation also at YEAR END (if necessary).

Question 8

TYPES OF CONFIRMATION?

Answer 8

01.POSITIVE CONFIRMATION REQUESTS:
Positive confirmation requests asks confirming party to reply auditor in all cases whether he agrees or disagrees with the amount mentioned in confirmation.
RISK IN POSITIVE CONFIRMATION:
1.If balance to be confirmed is included in the reuests(METHOD-1).confirming party may reply without due verification.
To reduce this risk,Another method(METHOD-2) is used.e.g Amount to be confirmed is not included in reuest,confirming party is required to fill it himself (BLANK CONFIRMATION).

Question 9

02.NEGATIVE CONFIRMATION ?

Answer 9

Negative Confirmation asks confirming party to reply auditor if he disagrees with the amount mentioned in the requests.
RISK IN NEGATIVE CONFIRMATION:
Negative confirmation is a less reliable evidence because there is NO explicit evidence that Confirming party received and verified.Confirmation may lost OR disregarded by Third party.To reduce this risk ,Negative confirmation can only be send If all of the following Conditions are Met.

Question 10

WHEN TO USE NEGATIVE CONFIRMATION ?

Answer 10

Negative confirmation is used,when all of the following conditions are met.
01.When population consists of large number of small balances(salaried class).
02.When Inherent Risk & Control risk ,both are assessed as Low .
03.When very low exception rate is expected (< and = 15%).
04.Auditor is unaware of any circumstances that Confirming party will disregard such request.

Question 11

AUDIT PROCEDURES AFTER RECEIPT OF REPLIES:
01.IF A RESPONSE INDICATING AGREEMENT ?

Answer 11

iF A RESPONSE INDICATING AGREEMENT,IT FORMS SUFFICIENT APPROPRIATE AUDIT EVIDENCE,nO FURTHER WORK ARE REUIRED.

Question 12

AUDIT PROCEDURES AFTER RECEIPT OF REPLIES:
02.IF A RESPONSE INDICATING DISAGREEMENT /EXCEPTION:

Answer 12

IF THERE IS A DISAGREEMENT ,AUDITOR SHALL ASK CLIENT TO RECONCILE THE BALANCE IN ITS RECORDS WITH BALANCE CONFIRMED BY THE PARTY.
RECONCILIATION SHOULD BE CHECKED BY AUDITOR TO DETERMINE WHETHER THIS EXCEPTION IS BECAUSE OF
01. TIMING DIFFERENCE(I.E CASH IN TRANSIT OR GOODS ARE IN TRANSIT )OR
02.MISTATEMENTS IN RECORDS OF CIIENTS.OR
03 MISTATEMENTS IN RECORDS OF CONFIRMING PARTY.
– IF EXCEPTION IS INDICATIVE OF WEAKNESS IN INTERNAL CONTROL OR FRAUD,AUDITOR SHALL ALSO INCREASE RISK OF MATERIAL MISSTATEMENT.

Question 13

A NON-RESPONSE OF POSITIVE CONFIRMATION ?

Answer 13

FOLLOW UP PROCEDURES SHOULD BE PERFORMED(SEND ANOTHER REQUEST OR ASK CLIENT TO CONVINCE THE PARTY TO REPLY),IF STILL PARTY DONNOT REPLY,AUDITRO SHALL PERFORM ALTERNATIVE AUDIT PROCEDURES.

Question 14

ALTERNATIVE PROCEDURES ,IF POSITIVE CONFIRMATION FROM ACCOUNTS RECEIVABLE IS NOT RECEIVED ?

Answer 14

01.EXAMINE THE CASH RECEIVED FROM CUSTOMER AFTER THE BALANCE SHEET DATE,OBTAIN EXPLANATION FOR CASH NOT RECEIVED WITHIN CREDIT PERIOD.
02.IF CASH IS NOT RECEIVED OR PARTLY RECEIVED,AUDITOR SHALL INSPECT CUSTOMER SIGNED SALES ORDER,SALES INVOICES,GDN AND OTHER DOCUMENTS ACKNOWLEDGED BY CUSTOMER.
03. IF ANY AMOUNT IS DISPUTED,CHECK CORRESPONDENCE WITH DEBTOR,LAWYER’S OPINION,ENSURE APPROPRIATENESS OF PROVISION.
04.PERFORM CUT-OFF TEST BY EXAMINING THE SALES NEAR BALACE SHEET DATE.
05 COMPARE BALANCE WITH MONTHLY ACCOUNT STATEENT SEND BY THE DEBTOR(IF AVAILAIBLE).

Question 15

ALTERNATIVE PROCEDURES IF POSITIVE CONFIRMATION FROM ACCOUNTS PAYABLE IS NOT RECEIVED ?

Answer 15

01.EXAMINE CASH PAID AFTER THE BALANCE SHEET DATE,OBTAIN EXPLANATION FOR CASH NOT PAID WITHIN CREDIT PERIOD.
02.IF CASH IS NOT PAID OR PARTLY PAID ,AUDIT SHALL INSPECT SUPPLIERS SIGHNED PURCHASE ORDER,PURCHASE INVOICE,GRN & OTHER DOCUMENTS .
03.PERFORM CUT-OFF TESTS NEAR BALANCE SHEET DATE BY EXAMINING PURCHASES.
04.COMPARE BALANCE WITH ACCOUNT STATEMENT SENT BY THE SUPPLIER.

Question 16

WHEN A RESPONSE IS ORAL (e.g THROUGH TELEPHONE)

Answer 16

AUDITOR SHALL REUEST CONFIRMING PARTY TO CONFIRM BALANCE IN WRITTEN BECAUSE ORAL RESPONSE DOESNOT MEET THE DEFINITION OF CONFIRMATION LETTER.
– IF WRITTEN RESPONSE IS NOT RECEIVED , THIS IS SAME AS NON-RESPONSE.
AUDITOR SHALLL PERFORM ALTERNATIVE AUDIT PROCEDURES TO OBTAIN AUDIT EVIDENCE.

Question 17

WHEN A RESPONSE IS REEIVD INDIRECTLY(via MANAGEMENT)

Answer 17

AUDITOR SHALL REQUEST CONFIRMING PARTY TO CONFIRM BALANCE DIRECTLY,BECAUSE INDIRECT RESPONSE DOESNOT MEET DEFINITION OF CONFIRMATION LETTER.

Question 18

WHEN A RESPONSE IS RECEIVED ELECTRONICALLY( email or fax )

Answer 18

AUDITOR SHALL OBTAIN EVIDENCE WHETHER
.SOURCE IS AUTHENTIC
.COMMUNICATION PROCESS IS SECURED AND CONTROLLED e.g : By use encryption, digital signatures.

Question 19

AUDITOR’S PROCEDURES IF MANAGEMENT REFUSES TO ALLOW AUDITOR TO SEND CONFIRMATION LETTER ?

Answer 19

IF MANAGEMENT REFUSES TO ALLOW THE AUDITOR TO SEND CONFIRMATION REQUEST,THE AUDITOR SHALL INQUIRE REASON FRO REFUSAL FROM MANAGEMENT (e.g It may be because of legal dispute or ongoing negotiation) and shall validate the refusal.
01.IF REFUSAL IS REASONABLE:
Auditor shall try to obtain evidence from alternative audit procedures.if Auditor is unable to obtain evidence from alternative audit procedures ,It will be SCOPE LIMITATION,Auditro shall express QUALIFIED OPINION(if effect is MAERIAL) OR DISCLAIMER OF OPINION
(if effect is pervasive).
02.IF REFUSAL IS NOT REASONABLE:
-Discuss the issue with TCWG and request to allow auditor to send confirmation letter. If Auditor is still not permitted,IT WILL AFFECT AUDIT AS FOLLOWS.
01.. IMPLICATIONS ON AUDITOR’S REPORT:It will be scope limitation imposed by management.Auditor shall express QUALIFIED OPINION(If effect is material) or DISCLAIMER OF OPINION (if effect is pervasive).
02.. OTHER IMPLICATIONS ON AUDIT :Auditor shall re-evaluate the integrity of management and shall consequently revise the risk of material misstatement (including risk of fraud )and shall modify nature ,timing and extent of audit procedures.
.. If auditor has serious concern about integrity of management,he may also consider withdrawal from engagement.

Question 20

BANK CONFIRMATION LETTER:?

Answer 20

FOLLOWING INFORMTION IS NORMALLY REQUESTED BY AUDITOR IN A BANK CONFIRMATION REQUEST.
01.INFORMATION REGARDING BANK ACCOUNTS.
02.INFORMATION REGARDING OVERDRAFTS/LOANS.
03.INFORMATION REGARDING CONTINGENT LIABILITIES.
04.ADDITIONAL INFORMATION.

Question 21

01.INFORMATION REGARDING BANK ACCOUNTS :

Answer 21

01.FULL TITLE & A/C NUMBER ALL BANKS A/C HELD IN THE NAME CLIENT,ALONGWITH BALANCES AT YEAR END.
02.FOR ALL A/C CLOSED DURING THE YEAR,FULL TITLES AND DATES OF CLOSURE.
03.THE SEPARATE AMOUNTS OF INTEREST CREDITED/CHARGED DURING THE YEAR.
04DETAILS OF UNPAID INTEREST/BANK CHARGES.
05.IF THERE IS ANY RESTRICTION ON BANK A/CS,INFORMATION REGDARDING NATURE & EXTENT OF RESTRICTION.

Question 22

02.INFORMATION REGARDING OVERDRAFTS/LOANS

Answer 22

01.DETAILS OF OVERDRAFT /LOANS.
02.DETAILS OF ANY ASSET HELD AS SECURITY BY BANK INCLUDING TYPE OF LIEN/CHARGE (pledge, mortgage).
03.TERMS OF INTERST/MARKUP.
04REPAYMENT SCHEDULE.
05.DEBT-COVENANTS(e.g restrictive conditions attached to loan)

Question 23

03.INFORMATION REGARDING CONTINGENT LIABILITIES.

Answer 23

DETAILS OF CONTINGENT LIABILITIES (Guarantees, Letters of credits)

Question 24

04.ADDITIONAL INFORMATION:

Answer 24

A LIST OF OTHER BANKS OR BRANCHES OF YOUR BANKS,WHERE YOU ARE AWARE THAT A RELATIONSHIPHAS BEENESTABLISHED BY THE COMPANY.

Question 25

LEGAL CONFIRMATION LETTER :

Answer 25

01.LIST OF LITIGATION AND CLAIMS PENDING AGAINST COMPANY ( OF WHICH LAWYER IS AWARE).
02.ASSESSMENT OF OUTCOME OF THE LITIGATION AND CLAIMS.
03.ESTIMATE OF THE FINANACIAL IMPLICATIONS.