CAF 08: Audit and Assurance

Outlines:
Chapter 14: External Confirmation
This chapter discusses Use of External Confirmation in Audit, particularly when Negative confirmation is
Secret Sheet for Quick Revision
used, or Disagreement or Non-response. Premium Content
(For students of Muhammad Asif, FCA)
(For Spring 2022)

LO 1: Definition and Use of External Confirmation LO 2: Procedures in Using Confirmation Request

LO 3: Types of Confirmation

Definition: 1. Decide timing (interim or final).

q Obtaining evidence directly from a third party in written form. 2. Decide parties (e.g. major parties, or high risk parties). Positive Confirmation Negative Confirmation
3. Decide information (closing balance + other information) (requests reply in all cases) (requests reply in disagreement only)
Situations: 4. Decide type (positive or negative)
q Debtors, Creditors, 5. Obtain authorization
q More reliable. q Less reliable as no explicit evidence.
q Banks, Lawyers (100%, No alternative) 6. Send letters.
q Risk of reply without verification --> q Allowed only if following 4 conditions are met:
7. Appropriate procedures on replies.
Use Blank Confirmation * Large number of small balances.
Confirmation As evidence: 8. Summary and conclusion.
* IR & CR are low.
q Highly reliable evidence (written, external and direct).
* Low exception rate is expected.
q Provide evidence about Existence, Rights and Obligation,
Procedures at year-end if confirmation used at interim date: * Confirming party will not disregard request.
Accuracy, Valuation and allocation.
q No evidence about Completeness. 1. Compare individual balances.
2. For intervening transactions, perform:
Whether or not to use: a. tests of controls (on sample), and
Omit external confirmation: b. tests of details (on major items). Tips for Case Studies
1. Risk is low, or 3. Send confirmation letter (if necessary). 1. Can we use negative confirmation if:
2. Balance is immaterial, or (a) two conditions are met two are not.
3. Evidence obtained from other procedures, or (b) two conditions are met two are silent.
4. management requests and request is reasonable. 2. When to use combination.

LO 4: Audit Procedures after Receipt of Replies

A response indicating agreement:
q No further work required.
A response indicating exception/disagreement: A non-response of positive confirmation: When a response is oral: (e.g. through When a response is received indirectly: When a response is received
General Procedures: (alternative procedures) telephone) (via management) electronically: (e.g. email or fax)
q Ask client to prepare reconciliation. 1. Check cash after year-end. q No confirmation. q No confirmation. q Check source is authentic.
q Check timing difference, or misstatement 2. Check supporting documents. q Ask to confirm in writing. q Ask to confirm directly. q Check controls over
q Increase risk. 3. Perform cut-off Otherwise, non-response. Otherwise, non-response. communication process i.e. encryption,
4. Check monthly account statements. digital signature.
Specific Procedures: 5. Check correspondence (if any amount
q Depends on nature of disagreement is disputed)
(given in case).
 CAF 08: Audit and Assurance
Outlines:
Chapter 14: External Confirmation
This chapter discusses Use of External Confirmation in Audit, particularly when Negative confirmation is
Secret Sheet for Quick Revision
used, or Disagreement or Non-response. Premium Content
(For students of Muhammad Asif, FCA)
(For Spring 2022)

LO 5: Management's refusal to send Confirmation LO 7: Information to be confirmed

Reasonable Justification No Reasonable Justification Bank Confirmation Letter Legal Confirmation Letter
(e.g. dispute, ongoing negotiations)
Discuss with TCWG. If still unresolved..... a. Information regarding bank accounts: 1. List of cases.
Perform Alternative Procedures 1. Bank accounts and balances at year-end. 2. Outcome.
2. Details of accounts closed. 3. Financial implications.
Effect on Report: Other effects/implications: 3. Interest.
q If evidence obtained, q If evidence not obtained, scope q Scope limitation by management. 1. Increase risk (of fraud) and 4. Bank charges.
Unmodified opinion limitation. q Qualified opinion (if material) or procedures 5. Restrictions.
q Qualified opinion (if material) or Disclaimer of opinion (if pervasive). 2. Re-evaluate integrity.
Disclaimer of opinion (if pervasive). 3. Withdrawal (if serious concerns) b. Information regarding overdrafts/loans:
1. Details of loan.
2. Security.
3. Repayment Schedule.
4. Terms of Interest/Markup.
LO 6: Summary and Conclusion 5. Debt-covenants.

c. Information regarding contingent liabilities:

d. Additional Information.