An external confirmation provides documentary evidence through a third party's written reply sent directly to the auditor, including a response transmitted electronically. Its usefulness depends on the respondent's knowledge, the question asked, and the integrity of the communication.
The auditor designs requests to confirm significant account balances, individual transactions, contractual terms, or other information relevant to the assessed risk. A customer's agreement with an outstanding invoice supports existence, but does not by itself establish that the customer can pay.
Confirmation design follows the assertion:
- For receivable existence, identify the customer, confirmation date, currency, and outstanding invoices or account balance.
- For transaction occurrence and cutoff, request relevant delivery, acceptance, service completion, or transaction dates, rather than asking only for a total.
- For payable completeness, consider active suppliers with small or zero recorded balances and request their outstanding items. Restricting requests to recorded liabilities can miss omitted obligations.
- For rights, obligations, or disclosures, request relevant restrictions, collateral, guarantees, repayment provisions, and other contractual terms.
Common mistakes
- Positive silence treated as agreement. An unanswered $72,000 positive request remains unresolved even if most other customers replied.
- Current balance substituted. A January 12 balance answers a different question from the December 31 balance requested.
- Unmatched collection accepted. A $72,000 deposit without payer and invoice application evidence does not establish collection of invoice 642.
Bottom line
- Confirmation design connects the assertion, knowledgeable respondent, requested information, dispatch control, and direct return route.
- Positive requests require replies; blank requests seek independently supplied information; negative silence provides limited evidence.
- Existing nonissuer rules permit negative confirmations alone only when all four conditions hold.
- Revised issuer rules require confirmation or direct external access for specified cash and receivables, subject to the stated receivables exception.
Exam shortcut
Identify the regime and applicable version before choosing a confirmation method. Treat “low risk” as one fact, then check every remaining condition. Read the return route before the amount. Separate direct receipt, reliable identity, complete answers, and actual agreement. For “paid,” locate the payment identifier and relevant dates. For a later deposit, connect the payer and application to the selected invoice.
The full lesson (about 4,917 words, 33 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.D3
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.