07-PS_External Confirmations AS2 V12

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The Audit Experience AS/2

Performance SupportExternal Confirmations

The information in this performance support is provided to describe key information surrounding the use of external

confirmations when addressing risks in our audits. This includes describing what an external confirmation is the

processes around sending and receiving confirmations what to do with replies where you have discrepancies and

what to do when confirmations are not received.

This performance support will cover the following topics !click on a link to go to the topic"#

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Step 1# Select account balances or information to be confirmed

Step 2# 0repare and control mailing of confirmations

Step # aintain a confirmation control sheet

Step 3# Evaluate replies

Step 4# Evaluate and conclude

WHAT IS AN EXTERNAL CONFIRMATION?

An external confirmation is 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.

Why do we use external confirmations and how are they useful?

External confirmations are fre5uently used when addressing risks associated with account balances. +onfirmationsordinarily provide sufficient appropriate audit evidence concerning the risks of material misstatement linked to the

following assertions6 existence rights and obligations of accounts such as receivables and cash balances and in

some cases the completeness and valuation and allocation of certain liabilities !e.g. Trade 0ayables and long7term

debt".

+onfirmations need not be restricted to these items6 we may re5uest confirmation of the terms of agreements or

transactions an entity has with third parties. The confirmation re5uest is designed to ask if any modifications have

been made to the agreement and if so what the relevant details are.

+onfirmations are also used to obtain audit evidence about the absence of certain conditions !e.g. the absence of a

8side agreement9 that may influence revenue recognition".

When is it appropriate to confirm with third parties?

$e are re5uired to consider whether external confirmation procedures are to be performed as substantive audit

procedures. External confirmation procedures fre5uently are relevant when addressing assertions associated with

account balances and their elements but need not be restricted to these items.

+onfirmation with third parties is appropriate if third parties can be expected to provide relevant audit evidence and

if it is reasonably efficient to obtain such evidence.

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WHAT IS THE EXTERNAL CONFIRMATION PROCESS?

Step 1:

How do I determine what to confirm?

The first step in the confirmation re5uest process is to determine what information you would like to confirm. &n

designing the re5uest we need to consider the type of information it may be possible for respondents to readily

confirm. The type of information may affect the response rate and the nature of the audit evidence obtained. &n

addition respondents may not always be able to confirm certain types of information such as the overall accounts

receivable balance but may be able to confirm individual invoice amounts within the total balance as this may be

how their information systems are set up.

What are examples of account balances, classes of transactions, or disclosures and

information that I may confirm in my audits to address some risks?

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+ash :ank account balances

;uarantees credit facility securities foreign exchange exposure

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+onfirmation of securities held by third parties


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;oods held off site

0roperty plant and

e5uipment

0roperty valuations

+onfirmation of title deeds held by third parties

Accounts payable and

long7term debt

Account balances


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A neati.e external confirmationre5uest asks the confirming party to reply only in the event of disagreement with

the information provided in the re5uest. %owever when no response has been received to a negative confirmation

re5uest we remain aware that there will be no explicit audit evidence that intended third parties have received the

confirmation re5uests and verified that the information contained therein is correct. Accordingly the use of negative

confirmation re5uests ordinarily provides less persuasive audit evidence than the use of positive confirmation

re5uests and as such we need to consider performing other substantive procedures to supplement the use of

negative confirmations.

What types of positi.e external confirmations exist and which one do I use?

!losed confirmations? we seek confirmation of information that we provide !e.g. we ask for confirmation of a

stated account balance such as Accounts )eceivable".

$e generally use closed confirmations when testing risks related to overstatement!i.e. we want to confirm amounts

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recorded". )efer to the 0erformance Support?)isks of aterial isstatements for further information.

&lank / "pen confirmations?we detail the type of information we re5uire but do not provide details of specific

balances or transactions !e.g. we might want a bank to include full details of accounts rather than confirmation of

the information we supply to them".

$e typically use blank/open confirmations when testing for understatement. &n this case we are looking for

transactions that have been omitted and are not recorded in the general ledger. $e can use both blank/open or

closed confirmation depending on risks identified and the assertions to which they are linked. The relevance of the

audit evidence is dependent on the risk and thus can vary between engagements.

)efer to 0erformance Support?)isks of aterial isstatement and Assertions for further information.

$hen in doubt as to what confirmations to use you can always ask your field senior and he/she will be able to help.

ore information on positive and negative external confirmations and the design of external confirmations can also

be found in the AA ;2B# External +onfirmation 0rocedures.

Who prepares the confirmation letters?

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&n most instances we will prepare as much as possible of the template and then have the entity personnel complete

any information that we were not able to complete like customer addresses account information etc.

)eviewing prior year manual working papers is a good starting point in preparing confirmations. %owever be

aware of the risks as they may have changed from previous years which in turn might change the audit evidence

needed and the type of confirmations that are to be used. *ocal office procedures may vary with regard to

confirmations especially bank confirmations so ensure you are following the appropriate procedures.

Cou may want to ask your field senior if there is an electronic file you can use. &f not confirmation templates can be

found in your AS/2 file. These are available for your use in determining the confirmation type to use and standard

wording. Always be sure to incorporate any changes made each year to our templates into the confirmations you are

preparing. This will ensure you are capturing all the information you need in accordance with our audit approach.

What other items must be considered when preparin the confirmation letters?

The letter must be printed on the entitys letterhead. The entity is re5uesting that the third party provide

information to us as the auditors and therefore confirmations are formatted as a letter from the client to a

third party. Dnless a confirmation template !e.g. template formatted in a table compared with letter style"

is provided by us to the entity such as in cash confirmations the entity must have the re5uest on their

letterhead.

A person at the appropriate level of entity management must sign the letter. This is typically the +ontroller

+hief -inancial ,fficer or some other senior member of entity management who is authoried to re5uest

third parties to provide us the information we are re5uesting.

It must be addressed to the appropriate person. ,btain contact information for each of your selections

from the entity contact. The entity you are auditing should know the appropriate person to send

confirmations to as they are usually the personnel within that third party that the entity also deals with. &n

certain situations it will be necessary to call the contact before you send the confirmation6 ask your field

senior if this is necessary.

It must reflect the date at which confirmation of the information is requested. -or example if the period

under audit is 1


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results of the confirmation process will be biased because of the interception and alteration of confirmation re5uests

or responses.

$e ensure that we send out the confirmation re5uests that the re5uests are properly addressed and that we

re5uested all replies to be sent directly to our office. ail the confirmation re5uests in our envelopes bearing the

return address of the issuing office and enclose with each re5uest a business7reply paid envelope bearing the

address of the issuing office and the name of the person on the team that will be accumulating responses.

Entity personnel cannot mail or receive the confirmation?there is a risk that the reply could be altered reducing the

reliability of the evidence. :e very clear with the entity that the confirmations have to be mailed by us. ,nce they

are prepared and signed you will need to complete the mailing process yourself.

Always make !and keep" a photocopy and/or a scan that will be printed if needed of each signed confirmation prior

to mailing to the third party to be retained for use as a second re5uest if one is re5uired.

,nce photocopies and/or scans have been made and information entered into the +onfirmation +ontrol Summary

!see below for more information" mail your confirmations. 0ersonally mail all re5uests from a post office from our

office or a public post box !i.e. outside the entity=s control".

Step 0:

What is a confirmation control sheet?

A confirmation control worksheet should be used to control the confirmation process by tracking information of all

confirmations sent. This information should be documented in the working papers of the audit file !you can use

either section 21B Engagement anagement or within the section you are working on !e.g. cash receivables etc."".

This summary !or log" should include the recipient>s name company and contact information the date you sent the

original confirmation the date!s" of any follow up re5uest!s" the date the confirmations are received if received

and a working paper reference to show where the received confirmation is located in the audit file. &f a confirmation

is not received documentation of such non7receipt should also be maintained with a reference to where alternative

procedures have been performed.

-or further information refer to the AA ;2B# External +onfirmation 0rocedures and ;3B# )esults of

+onfirmation 0rocedures.

Step :

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Evaluate replies


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What do I do with recei.ed replies?

,nce responses are received certain procedures need to be performed to confirm the reliability of responses

received such as#

$e consider the response>s authenticity and perform audit procedures to dispel any concern.

$e consider whether there is any indication that external confirmations received may not be reliable. -or

example if we were following up on postmarks and note differences from the originated address this may

be an indication that the confirmations received may not be reliable. $e may choose to verify the source

and contents of a response in a telephone call to the purported sender. &n addition we re5uest the purported

sender to mail the original confirmation directly to us. This has become especially important with every7

increasing use of technology !e.g. fax or electronic mail". Ask your field senior if procedures like these are

necessary once a confirmation has been received. See below for more information. &t is important to stay

alert and always apply professional skepticism when performing external confirmation procedures.

+ompare the amount confirmed on the replies to the amounts recorded by the entity and cross7reference the

confirmation to the testing audit documentation. !-or more information on referencing refer to

0erformance Support?0reparing Audit


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internal control over financial reporting.

What is an example of procedures I should perform when I find a discrepancy in an

accounts recei.able confirmation?

$hen a confirmation is received that shows discrepancies for an accounts receivable confirmation if possible an

entity official who does not have access to cash remittances and who is not responsible for the receivables sub7

ledger/listing is normally re5uested to prepare reconciliations of any differences between the ledger balance and the

customer=s reply and to investigate any claims or complaints registered by the customer. $e normally verify the

differences and explanations given to us.

What if I do not recei.e a reply?

$hen a positive confirmation is re5uested and no response is received we

send second re5uests or third re5uests using the photocopies we maintained

in the +onfirmation +ontrol Summary. Feep your field senior up to date on

your responses and ask them for guidance when you are not receiving

re5uests timely.

&n addition we ordinarily ask entity personnel to contact the recipient of the

re5uest to elicit a response.


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The odel Audit 0rograms !A0" usually detail what alternative procedures need to be performed for material

classes of transactions account balances or disclosures. &f no such information is given consult with your field

senior to evaluate which alternative procedures to perform.

Step 4:

$e should evaluate whether the results of the external confirmation process together with the results from any other

audit procedures performed provide sufficient appropriate audit evidence regarding the risks of material

misstatement being tested.

What factors help us conclude on the results of the confirmation process?

The reliability of the confirmations and alternative audit procedures.

'ature of any exceptions including the implications both 5uantitative and 5ualitative of those exceptions.

Audit evidence provided by other audit procedures.

-or more information on the reliability of responses confirmation replies and no replies and evaluating responses

refer to the AA ;3B# )esults of confirmation procedures.

'ote that this performance support does not replace the AA. &t should be read in conGunction with the

applicable AA topics as the manual states the re5uirements of our audit approach and it provides

further guidance.

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07-PS_External Confirmations AS2 V12

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