Under ISA 505, 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, for the purpose of obtaining relevant and reliable audit evidence. This standard deals with the auditor's use of external confirmation procedures to obtain audit evidence in accordance with the requirements of ISA 330 and ISA 500.
Why Are External Confirmations Considered Relatively Reliable Evidence?
Audit evidence is more reliable when it is obtained from independent sources outside the entity, and audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. Accordingly, external confirmations received directly by the auditor may be more reliable than evidence generated internally by the entity.
What Is the Difference Between a Positive and a Negative Confirmation Request?
- Positive confirmation request — A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
- Negative confirmation request — A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.
A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered, is defined by the standard as a "non-response."
What Must the Auditor Maintain When Using These Procedures?
When using external confirmation procedures, the standard requires the auditor to maintain control over external confirmation requests, including determining the information to be confirmed or requested.
What If Management Refuses to Allow the Auditor to Send a Confirmation Request?
If management refuses to allow the auditor to send a confirmation request, the standard requires the auditor to inquire as to management's reasons for the refusal, and to seek audit evidence as to their validity and reasonableness.
What If the Auditor Doubts the Reliability of a Confirmation Response?
If the auditor identifies factors that give rise to doubts about the reliability of the response to a confirmation request, the standard requires the auditor to obtain further audit evidence to resolve those doubts.
When May Negative Confirmation Requests Be Used Alone?
The standard states that negative confirmations provide less persuasive audit evidence than positive confirmations. Accordingly, the auditor shall not use negative confirmation requests as the sole substantive audit procedure to address an assessed risk of material misstatement at the assertion level unless all required conditions are present, including that the population of items subject to negative confirmation procedures comprises a large number of small, homogeneous account balances, transactions or conditions.
Legal References
- ISA 505 — External Confirmations, Paragraphs 6, 7, 8 and 15.
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