Auditors commonly use confirmations to verify such items as cash, accounts receivable, accounts payable, employee benefit plans and pending litigation. Under U.S. Generally Accepted Auditing Standards, an external confirmation is “a direct response to the auditor from a third party either in paper form or by electronic other means, such as through the auditor’s direct access to information held by a third party.”
Some companies may be put off when auditors reach out to customers, lenders and other third parties — and sometimes confirmation recipients fail to respond in a timely, complete manner. Nevertheless, confirmations are an important part of the auditing process that you will better appreciate if you learn more about them.
The types of confirmations your auditor uses will vary depending on your situation and the nature of your organization’s operations. Confirmations generally come in the following three formats:
1. Positive. Recipients are requested to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.
2. Negative. Recipients are requested to reply directly to the auditor only if they disagree with the information presented on the confirmation.
3. Blank. The amount (or other information) is not stated on this type of request. Instead, it requests recipients to complete a blank confirmation form.
Confirmation procedures may be performed as of a date that is on, before or after the balance sheet date. If the procedures are not performed as of the balance sheet date, the account balance will need to be rolled forward (or backward) to the balance sheet date.
Mailed vs. electronic forms
In the past, auditors sent out confirmation letters through the U.S. Postal Service. Then, they waited to receive written responses from their audit clients’ customers, suppliers, banks, benefits plan administrators, attorneys and others. This was a cumbersome process. If an auditor failed to receive an adequate level of response, follow-up confirmation letters could be sent, which could lead to delays in the audit process. Alternatively, the auditor could contact nonresponding recipients by phone or in person. Otherwise, the auditor would need to perform alternative procedures.
Although written confirmations are still permitted, auditors routinely use electronic confirmations today. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider.
Electronic confirmations can be considered reliable audit evidence. In addition, they overcome some of the shortcomings of written confirmations. That is, they are sent and received instantaneously at no cost, and the electronic confirmation process is generally secure, minimizing the risks of interception or alteration. As a result, some financial institutions no longer respond to paper confirmation requests and will respond only to electronic confirmation requests.
Let us work together
External confirmations can be a simple and effective audit tool. Contact us if you have questions about how we plan to use confirmations during your next audit or if you have concerns about the efficacy or security of the confirmation process.
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