The International Federation of Accountants recently issued an international standard on auditing that provides guidance on the use by auditors of external confirmations as a means of obtaining audit evidence.
Confirmation is the process by which auditors obtain and evaluate direct communications from a third party in response to requests for information about a particular item affecting a client's financial statements.
An auditor may employ external confirmations for account balances and their components though their use need not be restricted to these items. Generally, audit evidence received from independent third parties is more reliable than audit evidence generated by a client. Take the case of Company X, which claims a customer owes it a certain dollar amount. An auditor may send an external confirmation to the customer to verify the amount that is owed and the agreement terms.
The new standard outlines for auditors how to respond to certain management requests, how to evaluate the results of the confirmation process and how to use positive and negative confirmations.
A positive confirmation form asks that a third party indicate whether he or she agrees with the information stated on the request. Some forms, which are referred to as blank forms, do not state the amount or other information, but request a recipient fill in the balance or furnish other information.
According to Jim Sylph, a technical manager at IFAC, negative confirmations ordinarily provide less reliable evidence than positive confirmations. The recipient responds only if he or she disagrees with the information given. In a situation where there are a number of small balances but not many errors are expected, it is appropriate to use negative confirmations.
The standard extends existing guidance on confirmation of accounts receivable to all types of external confirmations and clarifies the design for and the process of obtaining such confirmations. It also provides suggestions for what the auditor should do when there is no response to a confirmation request.
Robert Roussey, former chairman of IFAC's international auditing practices committee, said that in making their determinations of whether or not to use confirmations, auditors should consider materiality, the level of risk and how planned audit procedures will reduce risk to an acceptable level.
This standard is effective for financial statement periods ending on or after December 31, 2001. It is available at the IFAC Web site, www.ifac.org.