SA 505- “EXTERNAL CONFIRMATIONS”
External Confirmation means Audit Evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
SCOPE OF THIS SA:
This Standard on Auditing (SA) deals with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the requirements of SA 330 and SA 500(Revised). Hence, this SA suggests the auditor to obtain confirmation directly from the third party in writing.
PROCESS OF EXTERNAL CONFIRMATION:
- Select the Item.
- Design the format.
- Communicate the request.
- Obtaining the response.
- Evaluate response and no response.
FORM OF EXTERNAL CONFIRMATION:
- Positive Confirmation request: – A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
- Negative Confirmation request: – A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.
- Non- response: – A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.
- Exceptional: – A response that indicates a difference between information requested, to be confirmed, or contained in the entity’s records, and information provided by the confirming party. The exception needs to be assessed to the entire population after analyzing the reason for difference.
EXAMPLES WHERE EXTERNAL CONFIRMATION IS USED?
- Bank Balance and other information from bankers;
- Accounts receivable balances;
- Accounts payable balances;
- Stocks held by third parties;
- Property title deeds held by third parties;
- Investments in shares and other securities;
- Investments purchased but delivery is not taken as on 31st March;
- Loans taken and loans given.
MANAGEMENT’S REFUSAL TO ALLOW THE AUDITOR TO SEND A CONFIRMATION REQUEST:
- Ask for reason;
- Evaluate implications on audit;
- Perform alternative procedures to get SAAE (Sufficient Appropriate Audit Evidence);
- If not possible to get SAAE- MODIFY the report.
FACTORS TO BE CONSIDERED:
The factors to be considered when designing confirmation requests include:
- The assertions being addressed.
- Specific identified risks of material misstatement, including fraud risks.
- The layout and presentation of the confirmation request.
- Prior experience on the audit or similar engagements.
- The method of communication (for example, in paper form, or by electronic or other medium).
- Management’s authorization or encouragement to the confirming parties to respond to the auditor.
- The ability of the intended confirming party to confirm or provide the requested information.
FOLLOW-UP ON CONFIRMATION REQUESTS:
The auditor may send an additional confirmation request when a reply to a previous request has not been received within a reasonable time. For example, the auditor may, having re-verified the accuracy of the original address, send an additional or follow-up request.
WHEN THESE CONFIRMATION LETTERS ARE GENERALLY SENT?
The auditor may request external confirmations either:
- On the date of the financial statements; or
- Any other date nearer to the date of financial statements; say March 15th.