Definition
The term “confirmation” in accounting refers to a procedure used by auditors to verify the accuracy of a client’s financial statements through direct communication with third parties. These third parties provide independent verification of the transactions and balances reported by the client. This technique helps auditors ensure the reliability of financial information and detect potential discrepancies or fraud.
Examples of Confirmations
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Bank Confirmation:
- An auditor may contact a bank to verify a client’s account balances and any outstanding loans or obligations.
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Customer Accounts Receivable Confirmation:
- An auditor could send letters to a company’s customers requesting confirmation of the amounts owed to the company as of a certain date.
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Supplier Accounts Payable Confirmation:
- An auditor might reach out to suppliers to confirm the amounts that the client owes for goods and services received but not yet paid.
Frequently Asked Questions (FAQs)
What is the purpose of using confirmation in an audit?
Answer: The primary purpose of using confirmation is to obtain independent and reliable evidence about the accuracy of the information presented by the client, thereby enhancing the credibility and reliability of the financial statements.
How do auditors choose which accounts to confirm?
Answer: Auditors typically select accounts with high balances or those with irregular or unusual transactions. They may also focus on accounts that are deemed to be at higher risk of error or fraud.
What are positive and negative confirmations?
Answer: Positive confirmations require the recipient to respond directly whether they agree or disagree with the information provided. Negative confirmations request a response only if the recipient disagrees with the information stated.
Are confirmations mandatory for all audits?
Answer: The necessity of confirmations varies depending on the audit’s scope and the auditor’s judgment, considering factors such as the nature of the client’s business and the risk assessment conducted.
How is the reliability of a confirmation ensured?
Answer: The reliability of a confirmation is ensured by sending requests to independent, third-party sources and by verifying that the responses are returned directly to the auditor.
What is circularization of debtors?
Answer: Circularization of debtors is a form of confirmation used to verify accounts receivable by contacting the debtors and confirming the amounts they owe to the company being audited.
How does bank confirmation work?
Answer: Bank confirmation involves an auditor sending a formal request to a client’s bank to verify account balances, loan amounts, and other relevant financial information.
What challenges are associated with obtaining confirmations?
Answer: Challenges include non-responsiveness from third parties, incomplete or inaccurate responses, and potential delays in receiving confirmation replies.
How do auditors handle non-responses to confirmation requests?
Answer: Auditors may need to perform alternative procedures, such as examining subsequent cash receipts, reviewing contractual agreements, or using internal records, to gather sufficient evidence.
Can electronic confirmations be used?
Answer: Yes, electronic confirmations are increasingly being used due to their efficiency and reduced risk of tampering compared to paper-based confirmations.
Related Terms
- Bank Confirmation: A type of confirmation that verifies a client’s banking data directly with the bank.
- Circularization of Debtors: Sending out requests to a company’s debtors to confirm outstanding balances.
- External Confirmation: Obtaining evidence directly from a third party rather than from within the client’s organization.
- Positive Confirmation: A request that requires the respondent to reply whether they agree or disagree with the provided information.
- Negative Confirmation: A request that asks the respondent to reply only if they disagree with the information.
Online Resources
- American Institute of CPAs (AICPA)
- PCAOB (Public Company Accounting Oversight Board)
- IFAC (International Federation of Accountants)
- The Institute of Chartered Accountants in England and Wales (ICAEW)
- CFA Institute
Suggested Books for Further Studies
- “Principles of Auditing & Other Assurance Services” by Ray Whittington and Kurt Pany - This book provides comprehensive coverage of auditing concepts and methods including confirmation.
- “Auditing and Assurance Services: An Integrated Approach” by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley - This text integrates both principles and techniques of auditing, including the usage of confirmations.
- “Auditing: A Risk-Based Approach to Conducting a Quality Audit” by Karla Johnstone-Zehms, Audrey Gramling, and Larry Rittenberg - Focuses on risk assessment and the importance of obtaining high-quality audit evidence.
Accounting Basics: Confirmation Fundamentals Quiz
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