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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

Is Audit a dying profession?

Is Audit a dying profession?

The audit industry is at a crossroads: as market expectations are shifting, technology is empowering auditors and improving quality, the case for audit’s evolution is growing, and more and more businesses are realizing the importance of the audit and assurance industry. In fact, many businesses that previously did not conduct audits now see the value in doing so.

People feel auditing is a dying industry, but it is not. As per research by Deloitte, the audit industry will grow rapidly in the coming 10 years. Times are challenging and auditing is evolving with the help of AI, which helps auditors to automate time-consuming manual activities and focus on higher-value activities. They are realizing the importance of returning to basic management principles in order to identify and correct problematic management practices; auditing plays an important role in this regard because only a genuine and effective audit can drive effective fraud detection and risk management procedures within a company.

AI helps auditors optimize their time by allowing them to perform better and smarter, allowing them to use their human judgment to assess a broader and deeper range of data and documents. The incorporation of modern technologies such as machine learning (ML), cloud computing, and artificial intelligence (AI) with audit software will drive market expansion. These products are used to improve organizations’ risk management skills.

As new standards enable Artificial Intelligence to create new chances for evidence generation, there is also an opportunity to rethink the skills that auditors can gain on the job. As data-driven methodologies grow more common in today’s audits, auditors may now claim to be learning key business skills as well as AI skills. The knowledge that auditors gain through these automation tools equips them to do their job better and deliver better quality reports and results to their clients.

Some people assume that when a part of a profession becomes automated, the human element of the same is devalued. I see the opposite happening with audit automation. As auditors are freed from the more tedious and manual aspects of auditing that are spreadsheet-driven and tick-and-tie tasks — there is more room for strategic insights and critical thinking. This only expands the significance of the work auditors carry out, the influence they have, and their relevance to the capital markets and the global economy.

 

About the Author:

Prashant Gupta is a Chartered Accountant by qualification but an Entrepreneur by passion. He comes with 5 years of experience as a Statutory Auditor before starting his own company Firmway Services, with a vision to Automate Audit Confirmation & Reconciliation for Auditors & Corporates.

A tech enabled approach for auditors to safeguard themselves from increased surveillance risk

A tech enabled approach for auditors to safeguard themselves from increased surveillance risk

Background

In the recent past, the audit profession has been the subject matter of public commentary and scrutiny thanks to the searing probe it is facing.

The increased weightage placed on statutory duties of auditors has exceptionally increased the risks associated with the audit profession. It is safe to say that scrutiny on auditors has substantially increased due to the constitution of the National Financial Reporting Authority under Section 132 of the Companies Act 2013. Now, auditors are looking at possible penalization for failure to detect fraud or non-compliance with statutory provisions. The penalization includes the power to debar the auditor or audit firm from undertaking an audit for up to 10 years. Even Big4s are not spared.

The shift in the spotlight can be clearly noticed in some recent case laws. For instance, in ICAI v. Mukesh Gang, the Hyderabad High Court held the auditors guilty of gross negligence and violation of auditing standards. The level of strictness with which auditors are penalized for such wrongs- is in contrast with decisions in cases such as Union of India v. M.N. Basu where the Calcutta High Court had stated that non-reporting of extending loan without passing a resolution under Section 370 of the Companies Act, 1956, was not due to gross negligence but due to an erroneous interpretation of the law.

The proposition of an auditor being a ‘watchdog and not a bloodhound’ in Re Kingston Cotton Mills is now seeming outdated. In the past, auditors have failed to pay too much heed to nuanced expectations like receiving independent external confirmations. However, with the paradigm shift in the way the profession is being viewed, auditors agree that the risk – rewards relationship is heavily skewed and while the risks of audit have disproportionately increased, the revenue is subpar.

This is driving auditors to become more innovative within the audit practice and use forward-looking and proactive tech enabled audit tools. Technology has started to make inroads in most audit firms, and this directly and positively impacts the quality of each audit. The use of sophisticated technology solutions like practice management, audit confirmation, sampling, and data analytics is fast becoming standard operating practice as firms are embracing the digital-first approach to engagements. Not only are these tools enabling auditors to improve accuracy and analyze anomalies, trends, and areas of risk, but they are also proving to be much more cost effective for auditors.

One such tool that is helping auditors optimize the quality of processes and mitigate potential risks related to audit confirmation is Firmway. Firmway provides web-based SaaS platform that digitize the entire audit confirmation process. In cases like the Satyam fraud case, it was found that auditors’ failure to properly execute third-party confirmation procedures resulted in the fraud going undetected. It was held that the auditor relinquished control of cash confirmations entirely to their client and failed to question the integrity of the confirmation responses they received from the client by following up with the banks.

The entire fraud would have been nipped in the bud if there had been a platform where auditors could independently confirm all balances from third-parties. In Arrangement with The ICAI, Firmway is one such platform that helps auditors automize the independent audit confirmation process in compliance with SA 505. Firmway intends to show a clear picture of the company’s financials and curtail any potential fraud and misinformation. It thus provides auditors and authorities a higher level of assurance and smoothens the overall audit process.

To know more about the Audit Confirmation tool – Click here

Balance Confirmation Letter

Balance Confirmation Letter

Illustrative of Balance Confirmation Letter to be sent to Debtors – Positive Form

[Letterhead of Entity]

[Date]

[Name and address of debtor]

Dear Sir,

For audit purposes, kindly confirm directly to our auditors (name and address of  the auditors) that  the balance of  Rs xx due by you as on ________ , as shown by our books, is correct. The details of the balance are as under: Note: In case the list of invoices forming the balance is too large, these details may not be given

Invoice No Date Order Reference / Acceptance / Tender No. etc. Amount
Total
Less : Advanced Received
Net Amount due by you		 xxxx
(xxx)
xxxx

A stamped envelope addressed to our auditors is enclosed for your convenience.

If the amount shown is in agreement with your books, kindly strike-out the paragraph marked (B) below. If the amount shown is not in agreement with your books, kindly furnish the details in the proforma given in the paragraph marked (B) below and strike-out paragraph (A).

In either case, kindly sign at the place provided below and return this entire letter directly to our auditors in the enclosed envelope.

Your prompt compliance with this request will be appreciated.

Kindly return this form in its entirety.

Yours Faithfully,

 

(Signature of responsible official of the entity)

(Name and Address of entity)

(A) We confirm that the above stated amount is correct as at ______

OR

(B) We state that the above-stated amount is not correct as per our records. The details of the balance as at _________ as per our records are as below:

Invoice Number Date Order Reference Amount
xxxxxxxxxxx xxxx Total xxxxxx
xxxxxxxxxxx xxxx Less : Advanced paid (xxxxx)
xxxxxxxxxxx xxxx Net Amount due from us(Rs) xxxxxx

Yours faithfully,

(Signature of debtor/responsible official)

Illustrative Balance Confirmation Letter to be Sent to Debtors Negative Form

[Letterhead of Entity]

[Date]

[Name and address of debtor]

Dear Sir,

For audit purposes, kindly write directly to our auditors (name and address of the auditors) if the balance of Rs. due by you as on _______ as shown by our books, is not correct, giving details of the differences. The details of the balance are as under:

Note: In case the list of invoices forming the balance is too large, these details may not be given

Invoice No Date Order Reference /Acceptance/ Tender No. etc Amount
Total
Less : Advanced Received
Net Amount due by you		 xxxx
(xxx)
xxxx

If you do not notify our auditors of any difference within ten days of the date of this letter, it will be presumed that the balance stated above is correct.

A stamped envelope addressed to our auditors is enclosed for your convenience.

Yours faithfully,

(Signature of responsible official of the entity)

Source: Guidance Note on Audit of Debtors, Loans and Advances published in June, 1994 issue of ‘The Chartered Accountant’.

Use Firmway.in for obtaining balance confirmation in compliance with the Guidance Note.

MSME Form 1 – All that you need to know

MSME Form 1 – All that you need to know

 

What is the fuss around MSME Form 1?

MCA came with an order dated 22nd Jan 2019 that:

 

Every Company which has received goods or services from Micro & Small Enterprise

AND

Payment is due/ not paid to such enterprise for 46 days from date of acceptance

Shall file in MSME Form 1

Note:

  • Only Micro and Small Enterprise Suppliers are considered. Medium Enterprise suppliers are not considered as per the notification.
  • The 45 days calculation starts from the date of acceptance/deemed acceptance and not from the date the balance becomes due

 

Who is MSME?

MSME is classified into two categories:

  1. Manufacturing enterprise; and
  2. Service enterprise.

They are defined in term of investment in Plant and Machinery/ Equipment  as below

MICRO SMALL MEDIUM
Manufacturing Enterprises < Rs 25 Lacs < Rs 5 Crs < Rs 10 Crs
Service Enterprises < Rs. 10 Lacs < Rs 2 Crs < Rs 5 Crs

 

Note: Only registered enterprises having valid MSME certificate shall be considered. Udyog Aadhar is also considered as MSME registration.

 

What is MSME Form 1?

A Half yearly return to the Ministry of Corporate Affairs stating the following:

  • Name of Supplier,
  • PAN of Supplier
  • Amount Due*
  • Date from which such amount is due
  • Reasons for Delay (Generic) (eg – Credit period>45 days, Goods in Transit, Material rejected/returned, etc)

Note:

  • Here the details like amount and date are with respect to the due date and not the date of acceptance.
  • For example, an MSME vendor delivered you goods on 1/12/18. The credit period is 60 days. Hence you have to report this vendor in MSME form 1 since it is more than 45 days as on 22/1/19. However, the amount due would be Nil and date from which such amount is due – 30/01/2019.

 

What is the due date?

Filing Period Due date of Filing
Initial Return (Payable for more than

45 days as on 22nd Jan 2019)

 30th May 2019
From April to September 31st October
From October to March 30th April

 

Note: Only the first return is an “as on 22nd Jan 2019” return. For regular returns post that, you have to report all the MSME vendors to whom the payment was not made within 45 days from the date of acceptance in the said period.

 

How do we do it?

Step 1: Go through your list of vendors to whom Payment is due/ not paid for 46 days from date of acceptance

Step 2: Identify the list of vendors you think can be MSME

Step 3: Send them MSME confirmation asking whether they are MSME as on the said date. And if yes, ask them to attach their registration certificate as on the said date

Step 4: Once you receive the certificate, furnish their details in Form MSME -1

 

Is it Mandatory to file MSME Form 1?

Yes.

Is there any Penalty?

Yes

  • On Nonfilling or
  • On Knowingly furnishes incorrect/ Incomplete Information.

 

Particulars Penalty
On defaulting company Extended Up to  Rs. 25,000/-
Every Officer who is in default

(Directors, CFO and CS)

 Minimum Fine Rs. 25,000/- which may extend to Rs. 3,00,000/-

Or

Imprisonment which may extend to 6 Months

Or

Both

 

What if I missed the due date?

Don’t Worry! MCA is currently allowing (as on 6/6/2019) filling of MSME Form 1 – Without Penalty.

 

What if I missed filling some vendors in the return?

Don’t worry! You can file another return for the same period with the vendors you missed in your earlier return

 

Is there any software which can easily get MSME confirmation from all Vendors?
The Firmway tool can allow the companies to manage their entire MSME confirmations for one time and recurring return. Just upload a simple excel file with Vendor Name, Email Id and mobile number. The software will automatically trigger email and SMS to every vendor, do a rigorous follow-up and provide a real-time dashboard.

Know more about it – firmway.in

Links:
MCA Notification – http://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf

MCA Form Download – http://www.mca.gov.in/MCA21/dca/downloadeforms/eformTemplates/NCA/Form_MSME_help.zip

 

Disclaimer:

All Readers are advised to refer relevant provision of law before applying or accepting any of the point mentioned above or not. The author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write-up.

Audit Confirmation Software

Audit Confirmation Software

Firmway helps to enhance the credibility of financials, detect and prevent frauds to uphold the interests of the various stakeholders.

Confirmations being an important source of authentication for the various stakeholders, the various flaws associated with the manual process had to be mitigated. To ensure a flawless and effortless process of obtaining confirmations, an effective and proficient platform was obligatory – this led to the birth of FIRMWAY. The unique verification process makes it the best way of obtaining confirmations.

Types of confirmations taken:

  • Debtor
  • Creditor
  • Loan
  • Stock
  • Bank Balance

Firmway sends the Confirmation, Verifies the Confirmer, carries out regular follow-ups with the Confirmer and Summarises Responses.

To Register please click here: https://app.firmway.in/register

Balance Confirmations – Never ending Nightmare for Finance department

Balance Confirmations – A Never ending Nightmare for Finance department

Financial year closure ensures that the accounts team is occupied with winding up their chef-d’oeuvre “Financials”, but the idea itself of obtaining manual #confirmations from debtors, creditors, banks proves out to be one of the culprits for undesirable hitches.

Finance team can relate their acquaintance with the daunting task of confirmations in regards to sending hundreds of confirmations, thousands of follow ups, lakhs of minutes spent over calls. The ever amounting #audit pressure is capable enough of driving an individual insane.

And if the individual survives the above-stated stages along with the unrealistic excuses like person is not on place, attending meeting, on leave, system issues, tight schedule etc., he is then exposed to the challenges of pursuing and closing the unreconciled differences by re-contacting those parties, asking ledgers, tallying line items, finding differences, communicating it, discussing it, negotiating it and finally closing it.

The story does not conclude at closure unless one has completed that one thing the whole world approves of – #‘Documentation’.

In spite of hundreds of days of hard work, the manual process leaves rooms for errors, #frauds, etc.

And by the time the whole cycle is about to complete; confirmations for the next quarter are at your doorstep awaiting actions

 

Are you facing similar problems?

No need to be worried anymore, a young team of Chartered Accountants in support with senior professionals of the fraternity have come up with a unique software to streamline the entire process – “FIRMWAY” – Confirmations. Simplified.

Firmway aligns with your existing accounting software, sends confirmations, does timely follow ups, assist in reconciling balances, summarizes the responses and gives you a real time dashboard for monitoring.

With the help of technology, it takes the legal validity of confirmations to a higher level, verified parties, authorized responses, IP address tracking and much more, at absolutely reasonable cost.

– Prashant Gupta

Co founder | CEO

FIRMWAY

Visit www.firmway.in or email at [email protected] for a quick web demo or a physical demo.

Want to know more about Firmway