Summary of SA 505 External Confirmations

1.     Summary of SA 505

External Confirmations

External confirmation		Process of obtaining Audit Evidence by direct communication with the third party
Objective		To obtain relevant & reliable audit evidence
Who prepares the confirmation request		Auditor
Who sends the confirmation request		Management, after approving the auditor for making such confirmation.
To whom the confirmation requests are sent		Confirming party
Matters on which external confirmations can be made		Matters regarding Account Balances & their elements such as :- v  Debtor balance; v  Creditor balance; v  Bank balance; v  Stock held by Third Parties; v  Property Title deeds held by Third Parties; v  Investments purchased but delivery not taken.
Auditor’s obligations		v  To make the external confirmations, v  To evaluate the reliability of External confirmations; v  To perform additional audit procedures in case of :- ·         Non-receipt of External confirmations, ·         Doubt over reliability of Confirmation Received.
Process of External Confirmations
Management refusal to make confirmations	The auditor shall evaluate :- v   validity of reasons for refusal; v  Implications on Auditor’s Assessed risk whether the auditor is satisfied with the reason given by the management for refusal Auditor’s obligations Yes Perform Additional procedures to obtain Audit evidences NO Communicate the matter to TCWG; & Determine the implications on the audit & the auditor’s opinion
Types of Confirmation Requests Basis Positive confirmation Negative Confirmation Meaning It asks the respondent to reply directly to the auditor in each and every circumstance, whether he agrees or disagrees upon the matter asked in the confirmation request. . Negative confirmation is simply a professional way for an auditor to say "don't bother me unless there is a problem." Cases when required When the auditor is of opinion that a positive confirmation request is necessary in the existing circumstances  to obtain sufficient appropriate audit evidence, such as :- v  Information related to confirmation is only available with the outside entity; v  High risk of specific fraud or the risks of collusion which can involve employees and/or management, prevent the auditor from relying on evidence from the entity.  v  when the accounting controls of a company have historically had very few errors and are thus considered to be strong v  Risk of material misstatement is very low; v  Small no. of balances; v  The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests