ISA 505 - External Confirmations

Question 1

ISA 505: External Confirmations:

Answer 1

> External Confirmation- It is about a reliable Written Audit Evidence obtained by Auditor from 3rd Party.

Recap - .More Reliable:
> External is more reliable than Internal Evidence.
> Written Document is more reliable than Oral Evidence.
> Directly by Auditor is more reliable than by Client Evidence.
> Original Document is more reliable than Photocopies as Audit Evidence.

Question 2

ISA 505: Two types of Confirmations:

Answer 2

1. Positive Confirmation Request (Supposed to reply back):
   > Agree or Disagree.
   > Blank Confirmations ( Blank part to be filled in by the 3rd party).
2. Negative Confirmation Request (The reply from 3rd Party will only be required if they are disagreeing) :
   > Disagree

Examples of where seek these Confirmations:
> Loan agreement,
> Agreements with 3rd Parties,
> Sales on Consignment bases,
> Debtors / Creditors.

Question 3

ISA 505: Procedure for Obtaining External Confirmation:

Answer 3

> Deciding the information to be confirmed.
Selection of confirming Party.
Designing the Request.
> Properly addressed to 3rd Party.
> Replied back to Auditor.
Sending the Request.
Follow up Requests.

Factors to be considered for designing Request:
> Assertions (Is it Existence or Valuation being tested),
> Specific identified risk,
> Layout and presentation of Request,
> Prior experience in Audit,
> Method of Communication,
> Management’s cooperation.
> Ability of 3rd Party to provide information.

Circumstances after sending out Requests:
1. Will be replied.
> But the reply will not be reliable.
> Conduct Additional Audit Procedures.

2. Will Not be replied.
   > Conduct alternate Audit Procedures.
3. Will Not be replied
   > and there are no Alternate Procedures.
   > refer to ISA 705 - Modification of opinion.
4. Will be replied
   > reliable Evidence
   > Will use that as Sufficient and Appropriate Audit Evidence.
5. Will be replied but what is in the FS is different from the confirmation from the 3rd Party, the Auditor must then practice Professional Skepticism, a questioning mind and investigate the matter.

> > Thumb rule:
Do not draw the conclusions unless the matter is investigated.

Question 4

ISA 505: Evaluation of Audit Evidence:

Answer 4

1. Audit Procedure (Seek for External Confirmation)
2. Audit Evidence (Confirmation Received) - If not reliable
3. Perform - Additional Audit Procedures.

Other Circumstances:
> Management’s Refusal to allow the Auditor to send Confirmation Request to 3rd Party.
> First Enquire with management to get their reasons for refusing.
> If a reasonable justification exists or was given by management, Yes move on to do an Alternate Audit Procedure.
> If the Alternate Audit Procedure fails, Communicate with TCWG ISA 360.
> Assess the Impact on FS and then opinion.

Question 5

ISA 505: Negative Confirmation Request

Answer 5

> Negative Confirmation Request- is a Persuasive Audit Evidence, (That is less reliable)
However there are situations where Negative Confirmation can be used provided the following 4 Conditions are met:
* Low Risk of Material Misstatement,
* Very low possibility of exception.
* Same category items.
* Experience of Auditor.