Definition
Confirmation Positive refers to a procedure where an auditor seeks direct verification from a third party about the accuracy of a specific financial item that pertains to a client. This type of confirmation requires a response, whether the information presented is correct or incorrect. Positive confirmations are often used by auditors to substantiate the existence and accuracy of account balances and other financial statements.
Examples
Customer Verifications: An auditor sends out positive confirmation requests to the client’s customers to verify the actual account balances recorded in the company’s books. Each customer must respond indicating whether the balance is accurate or provide the correct balance if it is not accurate.
Bank Confirmations: An auditor sends a positive confirmation to banking institutions where the client holds accounts, asking them to confirm the balances of various bank accounts as of the audit date.
Vendor Confirmations: An auditor requests vendors to confirm the amounts recorded as payables in the client’s books to establish the accuracy of the client’s liabilities.
Loan Confirmations: An auditor prompts lenders to confirm the loan principal amounts and interest due. This helps in verifying that the loans recorded on the financial statements are accurate.
Frequently Asked Questions (FAQs)
What is the main purpose of a positive confirmation? The primary purpose is to gather direct evidence from third parties to verify the accuracy and completeness of account balances and other financial transactions reported by the client.
How does positive confirmation differ from negative confirmation? Positive confirmation requires a response regardless of accuracy, whereas negative confirmation requests a response only if the information is incorrect.
Why might auditors prefer positive confirmations over other types? Because positive confirmations require a response in any case, they provide stronger audit evidence compared to methods that may not prompt any response.
When is positive confirmation typically used? It is used when the auditor believes there is a higher risk of material misstatement or when account balances are critical to the overall financial statements.
What actions are taken if no response is received to positive confirmation requests? Auditors may follow up with additional requests or perform alternative procedures such as inspecting subsequent cash receipts or shipment records to verify the transactions.
Related Terms
- Negative Confirmation: A request that requires a response only if the recipient disagrees with the stated information.
- Audit Evidence: The information obtained by an auditor during a review to substantiate financial statements.
- Substantive Procedures: Auditor activities aimed at obtaining evidence to detect material misstatements at the assertion level.
- Account Balance Verification: Audit’s part to ensure reported balances are accurate and reflect the true state of affairs.
Online References
Suggested Books
- “Principles of Auditing and Other Assurance Services” by Ray Whittington and Kurt Pany.
- “Auditing and Assurance Services: A Systematic Approach” by William F. Messier Jr., Steven M. Glover, and Douglas F. Prawitt.
- “Auditing: A Risk-Based Approach to Conducting a Quality Audit” by Karla Johnstone, Audrey Gramling, and Larry E. Rittenberg.
Fundamentals of Confirmation Positive: Auditing Basics Quiz
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