ISA: 505 External Confirmations states that ‘the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level’. An Auditor may obtain external confirmations from third parties to corroborate the audit evidence already available with the auditor. The Auditor shall determine whether positive or negative request is appropriate given the condition.
Responses or events of non-responses are required to be evaluated. Responses may be unreliable if they are served indirectly to the auditor, not served by the intended person or transmission is compromised and the auditor may have to perform additional procedures to resolve doubts and suspicion. In events of non-responses or management refusal to permit the auditor to seek confirmations, the auditor shall assess if modification in the auditor’s report is necessary.
Required:
Explain FOUR (4) examples of external confirmations and for each one identify:
i) an audit assertion that the external confirmation supports; and
ii) an audit assertion that the external confirmation does NOT support. (10 marks)
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Four examples of external confirmations are:
– Debtor’s confirmation letter
– Solicitor letter
– Bank report letter
– Certificate on stock held by third parties.
one example of each assertion only required.
Debtor’s confirmation letter
This letter provides evidence of the existence of the debtor when a reply is returned from that debtor direct to the auditor.
The letter provides evidence on cut-off because sales or cash receipts recorded in the incorrect accounting period will have to be reconciled to the balance provided by the debtor.
The letter does not provide evidence of completeness of the debtor balance because debtors may not query balances which are understated.
The letter does not provide evidence of the valuation of the debtor balance because the debtor cannot be expected to list all outstanding balances and confirmation of the debt does not mean it will be paid.
Solicitor letter
A solicitor letter provides evidence as to the existence of claims at the period end as the solicitor will confirm specific claims.
However, the letter does not necessarily confirm the valuation of claims due to uncertainty about the future or the completeness of any legal claims as solicitors do not normally provide a list of all claims – they prefer to comment only on claims they are actually asked about.
Bank report letter
A bank confirmation letter provides good evidence on the existence of the company’s bank accounts as the bank has confirmed this information in writing.
A bank letter cannot necessarily be relied on to provide complete or accurate information. Most banks place a disclaimer on the letter of ‘errors and omission excepted’ indicating that the auditor must review this evidence against other cash and bank evidence obtained.
Certificate on stock held by third parties
A letter from the third party holding the stock will provide evidence of the existence of that stock because the third party has confirmed this in writing.
However, the letter does not provide evidence regarding the valuation of the stock; confirming something exists does not necessarily mean it is in good condition.