Confirmation (AR) PDF
Confirmation (AR) PDF
AU Section 330
The Confirmation Process
(Supersedes section 331.03.08.)
Source: SAS No. 67.
Effective for audits of fiscal periods ending after June 15, 1992, unless
otherwise indicated.
AU 330.04
1898 The Standards of Field Work
AU 330.05
The Confirmation Process 1899
.10 The lower the combined assessed level of inherent and control risk,
the less assurance the auditor needs from substantive tests to form a con-
clusion about a financial statement assertion. Consequently, as the combined
assessed level of inherent and control risk decreases for a particular assertion,
the auditor may modify substantive tests by changing their nature from more
effective (but costly) tests to less effective (and less costly) tests. For example,
if the combined assessed level of inherent and control risk over the existence
of cash is low, the auditor might limit substantive procedures to inspecting
client-provided bank statements rather than confirming cash balances.
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1900 The Standards of Field Work
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The Confirmation Process 1901
of responses to negative confirmation requests indicates a pattern of mis-
statements, the auditor should reconsider his or her combined assessed level
of inherent and control risk and consider the effect on planned audit proce-
dures.
.22 Although returned negative confirmations may provide evidence about
the financial statement assertions, unreturned negative confirmation requests
rarely provide significant evidence concerning financial statement assertions
other than certain aspects of the existence assertion. For example, negative
confirmations may provide some evidence of the existence of third parties if
they are not returned with an indication that the addressees are unknown.
However, unreturned negative confirmations do not provide explicit evidence
that the intended third parties received the confirmation requests and verified
that the information contained on them is correct.
Prior Experience
.23 In determining the effectiveness and efficiency of employing confirma-
tion procedures, the auditor may consider information from prior years' audits
or audits of similar entities. This information includes response rates, knowl-
edge of misstatements identified during prior years' audits, and any knowledge
of inaccurate information on returned confirmations. For example, if the auditor
has experienced poor response rates to properly designed confirmation requests
in prior audits, the auditor may instead consider obtaining audit evidence from
other sources.
Respondent
.26 The auditor should direct the confirmation request to a third party who
the auditor believes is knowledgeable about the information to be confirmed.
1
Bill and hold sales are sales of merchandise that are billed to customers before delivery and are
held by the entity for the customers.
AU 330.26
1902 The Standards of Field Work
For example, to confirm a client's oral and written guarantees with a fi-
nancial institution, the auditor should direct the request to a financial in-
stitution official who is responsible for the financial institution's relation-
ship with the client or is knowledgeable about the transactions or arrange-
ments.
.30 When using confirmation requests other than the negative form, the
auditor should generally follow up with a second and sometimes a third request
to those parties from whom replies have not been received.
2
Section 334, Related Parties, paragraphs .09 and .10, provide guidance on examining related-
party transactions that have been identified by the auditor.
3
The need to maintain control does not preclude the use of internal auditors in the confirmation
process. Section 322, The Auditor's Consideration of the Internal Audit Function in an Audit of Finan-
cial Statements, provides guidance on considering the work of internal auditors and on using internal
auditors to provide direct assistance to the auditor.
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The Confirmation Process 1903
Alternative Procedures
.31 When the auditor has not received replies to positive confirmation re-
quests, he or she should apply alternative procedures to the nonresponses to
obtain the evidence necessary to reduce audit risk to an acceptably low level.
However, the omission of alternative procedures may be acceptable (a) when
the auditor has not identified unusual qualitative factors or systematic charac-
teristics related to the nonresponses, such as that all nonresponses pertain to
year-end transactions, and (b) when testing for overstatement of amounts, the
nonresponses in the aggregate, when projected as 100 percent misstatements
to the population and added to the sum of all other unadjusted differences,
would not affect the auditor's decision about whether the financial statements
are materially misstated.
a. The entity's claims against customers that have arisen from the sale
of goods or services in the normal course of business, and
b. A financial institution's loans.
Confirmation of accounts receivable is a generally accepted auditing procedure.
As discussed in paragraph .06, it is generally presumed that evidence obtained
from third parties will provide the auditor with higher-quality audit evidence
than is typically available from within the entity. Thus, there is a presumption
that the auditor will request the confirmation of accounts receivable during an
audit unless one of the following is true:
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1904 The Standards of Field Work
Effective Date
.36 This section is effective for audits of fiscal periods ending after June
15, 1992. Early application of this section is permissible.
4
For example, if, based on prior years' audit experience or on experience with similar engage-
ments, the auditor concludes that response rates to properly designed confirmation requests will be
inadequate, or if responses are known or expected to be unreliable, the auditor may determine that
the use of confirmations would be ineffective.
AU 330.35