External Confirmation
Examples of external confirmations In Auditing
External
confirmation may be a progression of getting proof by auditor straightly from a
3rd party in written (on paper, electronic, or another medium).
Whether
or not to use verification as Audit confirmation:
External authentication
is usually used in audit events because it supplies the most reliable proof (being on
paper, exterior, and direct proof).
However,
external confirmation isn't a required procedure and the auditor may omit it in the following situations:
·When
there's no or low danger of material misstatement.
·When
balance is not material.
·When verifying
gathering doesn't have aptitude, impartiality or
·Willingness
to respond.
·When
evidence is often obtained from other substantive procedures.
·When the administration
appeals to the auditor to not send authentication appeals and there's a reasonably
priced justification for this.
A condition where exterior corroboration events may provide pertinent audit proof.
Usually, a confirmation procedure is employed to verify information from:
·
Debtors/Creditors
· Banks
· Lawyers
·
Catalog/funds/land heading deeds detained by 3rd parties.
ASSERTIONS
ADDRESSED BY CONFIRMATION
Existence
Confirmations
provide strong evidence for this assertion.
Completeness
Verification
may supply strong proof for this claim. if major parties with low down/zero/unenthusiastic
balances are also selected.
This may
identify unrecorded transactions.
Valuation
and Allocation
Authentications
offer weak proof for this allegation just in case of debtors (because nonpayer
may go broke and can still acknowledge the amount)
Rights
and Obligations
Confirmations
provide weak evidence for this assertion just in the case of debtors (because
debtors may are discounted).
PLANNING
THE CONFIRMATION EXERCISE
The auditor shall maintain control over the confirmation process i.e. he shall
· Select the
appropriate confirming parties.
· Decide the
information to be confirmed
· Design the
confirmation request
· Send the
confirmation himself.
The auditor shall decide;
1. About the timing of confirmation
2. Number of
customers to be confirmed
3.
Confirmation method to be used.
Timing
of Confirmation:
Confirmations
can be sent:
-at year-end
(to confirm year-end balance)
-before
year-end
If
confirmations are sent prior to year-end, the following further procedures are
performed at year-end to ensure that intervening transactions are not
materially misstated:
1. Obtain
break-up of balances (i.e. party-wise detail) at year-end
2. evaluate
it with temporary date equilibrium and examine the strange differences.
3. Attain of
dealings for the provisional era.
4. Choose a
sample of dealings and confirm them.
5. Consider the
need for additional confirmations at year-end (e.g. if balances have
significantly increased).
Confirmation
Method to be used
Generally,
there are 2 types of authentication necessities that are working by reviewer
i.e.
1. Positive
Confirmation Request
2. Negative
Confirmation Request.
Explanation
Positive
Confirmation Request
A stipulate
to agree with festivity to the response. whether he harmonize or distress with the
facts supply within the stipulated. (i.e. The hopeful corroboration require a
reply in all cases).
Risk is - Verify
party may reply without owing confirmation.
Negative
Confirmation Request
A demand to
verify party to reply only the verify party diverges with the information made
available within the demand. (i.e.) The unresponsive verification obligations a
reply only in case of deviation)
Risk is-
The proof is
less dependable as compared to optimistic verification because the nonattendance
of response may also be because:
(a)Requests
may be lost in transit.
(b)Parties may disregard requests to avoid efforts.
(c)Parties usually do not reply if
disagreement is in their favor (e.g. if deposits are overstated).
SAMPLE SELECTION AND PERFORMING THE CONFIRMATION EXERCISE
Audit
Procedures include the following:
1. Gain a list
of equilibrium and check the correctness and wholeness of the catalog.
2. If inhabitants
aren't all the same, stratification of inhabitants should be made.
3. An
appropriate sample selection method should be used. I choose the example, the following types of accounts should be measured for addition:
a. Material
balances
b. Nil
balances or Negative balances.
c. Overdue
accounts.
d. Accounts
with unusual activities e.g. with great disparity in balances or with ‘round’ expenses.
4. Corroboration
mail should be ready for selected revelry.
5.
Management’s authority should be obtained.
6. Mail
should be sent with the recurring mail address of the assessor.
AUDIT PROCEDURES FOLLOWING THE RECEIPT OF REPLIES:
When charges
the fallout of exterior verification require, the appraiser may classify such penalty
as follows:
a) A
response indicating agreement
b) A
response indicating Exception
c) A
non-response
A
response indicating agreement:
If response assigns
conventionality, it forms sufficient suitable audit verification. No additional
work is desirable.
A
response indicating Exception:
Exception
means retorts that point to a difference between in order to ask to be
confirmed and information confirmed by the verifying party. The auditor shall explore
exceptions to conclude whether they are misstatements or not.