objective
ISA 505, External Confirmations, says the auditor's objective when using external confirmation procedures is to obtain relevant and reliable audit evidence that enables him to confirm records.
External confirmation
It is the audit evidence that is obtained as a direct written response to the auditor from a third party (the confirming party), on paper, electronic or other means.
External confirmation procedures are normally carried out to confirm or request information regarding account balances and their elements (such as: accounts receivable and payable, banks and other third party deposits, liabilities, investments, inventories, guarantees, contingents and operations with related parties), in order to obtain audit evidence about the statements in the financial statements. They can also be used to confirm the terms of agreements, contracts or transactions between an entity and other parties, or to confirm the absence of certain conditions as separate agreements.
Audit evidence in the form of external confirmations received directly by the auditor from the confirming parties may be more reliable and increase the assurance the auditor obtains from the existing evidence within accounting records or from statements made by management.
In accordance with ISA 330, the auditor's response to identified risks describes the auditor's responsibility to plan and implement general audit responses to address the assessed risks of material misstatement at the financial statement level, and to design and execute audit procedures. additional, whose nature, opportunity and scope are based on (and respond to) the assessed risks of significant errors at the assertion level. In addition, it requires the auditor to design and execute substantive procedures for each class of transactions, account balances, and material disclosures.
Positive confirmation
One of the most effective procedures that the auditor can use to assure the integrity, existence, accuracy, presentation and disclosure of the figures in the financial statements are positive confirmations with third parties.
ISA 505 defines positive confirmation as 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.
If the auditor concludes that management's refusal to allow the submission of a confirmation request is unreasonable, or cannot obtain relevant and reliable audit evidence with supplemental audit procedures, it should contact those charged with governance or its equivalent., and indicate the implications that this fact has on the audit and your opinion.
Procedures
1. Determine the information to be confirmed or requested. To do so, regarding account balances, the terms of agreements, contracts or transactions between an entity and other parties may also be used.
2. Selection of the third parties that we are going to confirm.
3. Preparation of confirmation by the auditor (responses should be directed to the auditor's direction and not to the client). Design confirmation requests, verifying that they are addressed appropriately (test the validity of some or all addresses before sending them and that they contain sender information so that responses are sent directly to the auditor). Confirmation requests should be sent to a confirming party that the auditor believes is aware of the information to be confirmed.
4. Signature of the confirmation by an official of adequate level of our client
5. Sending the confirmation by the auditor (the company is asked to buy the stamps or contact us with their trusted transporter to send the confirmation)
6. Preparation of a control table to follow up on the confirmations sent
7. Receipt of the confirmations in the auditor's offices in original.
8. For confirmations not received we can make a second shipment and / or contact the third party to request the response.
9. Telephone confirmation of the sending of the confirmation by the third party, through a call made by the auditor to the offices of the third party that sent us the confirmation (This is done to detect false confirmations)
10. If a confirming party uses a third party to coordinate and respond to requests for confirmation, the auditor may perform procedures to address the risks that: a) the response may not be from the appropriate source; b) the person responding may not be authorized to do so, and c) the integrity of the transmission may have been compromised.
11. When an answer is returned indirectly (for example, because the confirming party incorrectly directed it to the entity instead of the auditor), the confirming party may be required to respond in writing directly to the auditor.
12. An oral response to a confirmation request does not meet the definition of an external confirmation because it is not a direct written response to the auditor. However, upon obtaining it, depending on the circumstances, the auditor may request the confirming party to respond in writing directly. If that response is not received, the auditor seeks other audit evidence to support the information in the oral response.
13. A response to a confirmation request may contain expressions of restriction regarding its use. These restrictions do not necessarily invalidate the reliability of the response as audit evidence.
14. Accounts receivable: Review of subsequent installments, review of supporting documentation (sales invoice) or other customer documentation that provides evidence of existence and evidence of the cut of sales that provide evidence of integrity.
15. Accounts Payable: Alternative procedures may include reviewing subsequent payments or correspondence from third parties that provides evidence of existence, and review of other records, such as product notes received, that provide evidence of completeness..
16. If the auditor has determined that a response to a request for confirmation is necessary to obtain sufficient appropriate audit evidence, the supplemental audit procedures will not provide the evidence required by the auditor, and should therefore assess the implications of this fact. in the audit and in your opinion.
Electronic Answers
Responses that are received electronically (such as fax or email) involve risks in terms of reliability since it is difficult to establish proof of the origin and authority of the respondent (alterations are difficult to detect). When responding by email, the auditor can telephone the confirming party to determine if they actually sent the response.
Attorney confirmations
In accordance with international auditing standards, the auditor must ensure that requests for confirmation to lawyers contain certain minimum information requirements that allow him to adequately identify the existence of litigation, lawsuits and liens. Some of these minimum requirements are mentioned below:
- Identification of the company, date of the revision and scope of the required information
- A relationship where it describes, quantifies and opines on the litigations, demands and encumbrances that exist at the date of the revision, as well as those that would have arisen during the period between the date of the financial statements and the date in which it is issued. the auditor's opinion on these statements.
- A report to the auditor on matters that, without being litigation, demands or encumbrances, are yet to be formalized as such.
- The debt for attorneys' fees and expenses at the date of the audit.
The auditor should analyze and evaluate the responses of the attorneys in order to quantify any possible loss or profit and judge their relative importance in relation to the financial statements under review.
Regarding fraud considerations that must be made in an audit of financial statements, the ISAs mention that once the auditor has completed the evaluation of the risks of fraud, in response and with professional skepticism, must proceed to obtain and evaluate the evidence. audit, through additional corroboration of management's explanations or statements regarding important matters, through confirmation by third parties.
