Auditor’s Use of Confirmation

Confirmation exception

Information in a confirmation response that differs from information the auditor obtained from the comp

Confirmation process

The process that involves selecting one or more items to be confirmed, sending a confirmation request directly to a confirming party, evaluating the information received, and addressing nonresponses and incomplete responses to obtain audit evidence about one or more financial statement assertions.

Confirmation request

A request from the auditor to a confirming party regarding information about one or more particular accounts, balances, transactions, or other items as a means of obtaining audit evidence about one or more financial statement assertions.

Confirmation response

Information obtained as a direct written communication (in paper or electronic form) to the auditor from a confirming party in response to a confirmation request.

Confirming party

A third party, whether an individual or an organization, to which the auditor sends a confirmation request.

Negative confirmation request

Auditor requests a confirmation response only if the confirming party disagrees with the information provided in the confirmation request.

Positive confirmation request

A confirmation request in which the auditor requests a confirmation response.

Nonresponse

A situation in which…

• after sending a confirmation request, the request is returned undelivered

• auditor does not receive a confirmation response to a positive confirmation request directly from the intended confirming party

• the auditor receives correspondence from the intended confirming party indicating that the confirming party is unable or unwilling to respond to the confirmation request; or (iv) the auditor receives an oral response only.

The objective of the auditor in designing and executing the confirmation process is to?

obtain relevant and reliable audit evidence from a knowledgeable external source about one or more relevant financial statement assertions of a significant account or disclosure

When the auditor obtains audit evidence during the course of the audit (including through the confirmation process) that contradicts the audit evidence on which the auditor originally based the risk assessment, the auditor should…

revise the risk assessment and modify planned audit procedures or perform additional procedures in respect to the revised risk assessments.

AS 2301 provides that as the assessed risk of material misstatement increases…

The evidence from substantive procedures that the auditor should obtain also increases.

The evidence provided by substantive procedures depends upon

the mix of the nature, timing, and extent of those procedures.

Audit evidence obtained from a knowledgeable external source is generally…

more reliable than evidence obtained only from internal company sources

Existence assertion

Concerned with whether recorded assets, liabilities, and equity balances actually exist at the date of the financial statements.

Occurence

addresses whether recorded transactions and events actually took place and pertain to the company during the audit period.

Completeness

assertion focuses on whether all transactions and accounts that should be presented in the financial statements have been included (i.e., nothing has been left out).

Right and Obligations

This assertion addresses whether the company holds the rights to its reported assets (e.g., they own them) and is obligated to pay its reported liabilities.

Positive confirmation request

asks the confirming party to reply directly to the auditor in all cases, indicating whether they agree or disagree with the information, or providing the requested information itself

What are the 2 positive confirmation request?

• Standard positive request

• Blank forms

Standard positive request

These state a specific balance or transaction details and ask the confirming party to verify whether the company's records are correc

Blank form

positive confirmation that do not state the amount or other details. Instead, they ask the confirming party to look up the balance and fill in the blank themselves

Which positive confirmations is more reliable?

Blank forms, because they force the recipient to check their own records rather than simply signing off on an already listed amount

Which positive confirmations result in lower response rates?

Blank-forms, they require more effort from the third party, which often forces auditors to perform more alternative procedures for nonresponse.

Negative confirmations

asks the confirming party to respond only if they disagree with the information stated in the request

Negative confirmations can only be used if these conditions are met…

1. The risk of material misstatement for the assertions has been assessed as low, and the auditor has obtained sufficient evidence that the company's relevant financial controls are designed and operating effectively.

2. The population is composed of many small, homogeneous items.

3. The auditor expects a low exception rate in response to the requests and has a reasonable, documented basis for this expectation.

Also must be paired with Substantive procedures

If the auditor is unable to identify a confirming party for a selected item who would provide relevant and reliable audit evidence in response to a confirmation request, the auditor should…

perform alternative procedures for the selected item

The reliability of evidence depends on…

nature and source of the evidence and the circumstances under which it is obtained.

Which confirmation request’s provides less audit eveidence?

negative confirmation requests, because the auditor typically does not receive from the confirming party a confirmation response to a negative confirmation request unless the confirming party disagrees with the information provided in the request.

 The auditor should maintain control over…

confirmation process to minimize the likelihood that information exchanged between the auditor and the confirming party is intercepted or altered.

What steps should auditors do to maintain control over confirmation process?

(i) select the items to be confirmed

(ii) send confirmation requests

(iii) receive confirmation responses

The auditor should send the confirmation request…

directly to the confirming party and obtain the confirmation response directly from the confirming party.

Examples that indicates that a confirmation request or confirmation response may have been intercepted or altered

• The confirmation response comes from a physical or electronic address other than the address on the confirmation request.

• The confirmation response does not include a signature of the confirming party or otherwise identify the confirming party.

• The confirmation response does not include a copy of the original confirmation request, e-mail chain, or any other information indicating that the confirming party is responding to the auditor’s confirmation request.

If the auditor does not receive a confirmation response to a positive confirmation request, the auditor should…

follow up with the confirming party

If a confirmation response is returned by the confirming party to anyone other than the auditor, the auditor should…

contact the confirming party and request that the response be re-sent directly to the auditor.

If the auditor does not subsequently receive a confirmation response from the intended confirming party, the auditor should…

treat the situation as a nonresponse.

In the case of a nonresponse or an incomplete response, the auditor should

perform alternative procedures for the selected item

In selecting the individual items of cash for which audit evidence should be obtained, the auditor should take into account

the auditor’s understanding of the company’s cash management and treasury function, and the substance of the company’s arrangements and transactions with third parties.

In selecting the individual accounts receivable for which audit evidence should be obtained,

the auditor should take into account the auditor’s understanding of the substance of the company’s arrangements and transactions with third parties and the nature of items that make up account balances.

the auditor should discuss with the audit committee the…

significant risks of material misstatement identified through the auditor’s risk assessment procedures.