All you need to know about External Confirmations

All you need to know about External Confirmations

While discharging the attestation function, a member of The Institute of Chartered Accountants of India (ICAI) is obliged to conduct financial audits as per Standards on Auditing (SAs). These standards represent generally accepted audit procedures. If a member deviates from SAs, the member is responsible for making a formal declaration. Otherwise, he(she) will be liable for disciplinary proceedings under The Chartered Accountants Act, 1949.

One such standard is SA 505: External Confirmations. It discusses the use of external confirmations and procedures to obtain direct evidence from third parties as required in SA 330: The Auditor’s Responses to Assessed Risks and SA 500: Audit Evidence

External Confirmation is required to give a true and fair view of the financials of a company. It serves as an extremely crucial piece of the puzzle when determining whether such financials are free from material misstatements or not.

External confirmation is a substantive procedure used to obtain audit evidence as a direct written response from a third party (customer/ vendor/bank) to the auditor in a paper, electronic, or any other form.  Generally, auditors use it to determine account balances, status, or terms of agreements. There are primarily three types of confirmation requests:

Positive Confirmation Request: It requires the confirming party to directly respond to the auditor whether it agrees or disagrees with the information provided in the request. Positive confirmations provide reliable audit evidence.

Negative Confirmation Request: It asks the confirming party to respond directly to the auditor only if the confirming party disagrees with the information provided in the request. They provide less persuasive audit evidence than positive confirmations.

Blank Confirmation Request: It is a type of positive confirmation request where the third party (confirming party) is asked to fill in the amount or provide certain information. It provides persuasive audit evidence since the confirming party must verify the information before responding.

Why is it needed?

For instance, in Mahavir Jain Vs Disciplinary Committee (Appellate Authority), the auditor formed his opinion without obtaining and examining external confirmations of all bank balances as required by SA 505. He was held guilty under Part 1 of the Second Schedule of the Chartered Accountant Act, 1949 for not exercising the due diligence expected of him and not obtaining sufficient information to form an opinion.

Further, SA 505 is the 3rd most non-compliant standard as per Quality Review Board in Financial Year (FY) 2020-21.

Process of external confirmation

As we know, obtaining confirmations manually via letters or even e-mails is a cumbersome procedure. One needs to maintain records and follow up continuously. External confirmations involve the repetition of the following steps for every account:

  1. Determine the information to be confirmed;
  2. Choose the appropriate parties;
  3.  Design the confirmation requests, properly addressed with a request to send responses directly to the auditor;
  4.     Send follow-up requests.

To simplify and streamline this process, big firms are shifting to an automated confirmation process as it allows audit teams to focus on analyzing results and identifying exceptions instead of spending time gathering the evidence.

Firmway is one such web-based SaaS software company that was started by a team of Chartered Accountants to help auditors automate the confirmation process. The entire confirmation process is digitized as per auditing standards. Auditors benefit from automating the time-consuming external confirmation process in the following way:

  • Save 90 % man-days by automating the process of sending, receiving, and tracking confirmations using our portal
  • Complete audit documentation as highlighted in the peer review process
  • Increase response rate by 2x
  • Send 1000+ confirmation requests in compliance with standards on auditing