Frequently Asked Questions
Auditor confirmation is a process where the auditor directly requests and receives information regarding account balances or other data from a third party (such as a bank or customer) to gather audit evidence. This process is highly important because it provides credible and independent evidence from an external source, reduces the risk of information manipulation by management, and helps uncover errors or fraud.
In positive confirmation, the recipient is obliged to respond to the auditor regardless of whether the information is correct or incorrect. This method has higher credibility but is more time-consuming. In contrast, negative confirmation only requires a response from the recipient if the provided information is incorrect; non-response is taken as confirmation. Negative confirmation is less costly but provides less reliable evidence.
Balance confirmation letters are primarily used to confirm balances of accounts receivable, accounts payable, cash and bank deposits, loans and facilities, as well as guarantees and commitments from third parties. Their main objective is to ensure the accuracy and completeness of these balances at a specific date.
International Standard on Auditing (ISA) 505, titled "External Confirmations," specifically addresses this topic. This standard provides a comprehensive framework for designing, sending, receiving, and evaluating evidence obtained from external confirmation procedures.
Common challenges include low response rates, delays in responses, errors in provided information, and management interference. To overcome these challenges, effective follow-ups, performing alternative procedures (if confirmation is not received), strict control over the letter sending and receiving process, and using secure electronic confirmation platforms can be utilized.
The auditor must have full control over this process to prevent any potential manipulation or interference by the audited company's management. This control ensures that the audit evidence obtained is independent and reliable, minimizing the likelihood of information misstatement. The direct dispatch of letters by the auditor and the direct receipt of responses to their address are fundamental principles of this control.
