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
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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.
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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.
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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.
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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)
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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.
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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.
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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.
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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.
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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.
- 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
### What is the main purpose of positive confirmation in auditing?
- [x] To gather direct evidence from third parties about the accuracy and completeness of account balances.
- [ ] To estimate the future cash flows of a business.
- [ ] To provide a detailed analysis of a company’s financial ratios.
- [ ] To develop internal control recommendations.
> **Explanation:** The primary purpose of positive confirmation in auditing is to gather direct evidence from third parties about the accuracy and completeness of the client's account balances and other financial transactions.
### How does positive confirmation differ from negative confirmation?
- [x] Positive confirmation requires a response regardless of the information accuracy.
- [ ] Positive confirmation does not require any response.
- [ ] Negative confirmation provides more substantial audit evidence.
- [ ] Both types of confirmation always provide the same level of assurance.
> **Explanation:** Positive confirmation requires a response regardless of whether the information is accurate or not, providing more substantial audit evidence compared to negative confirmation, which requests a response only if the information is inaccurate.
### Why is positive confirmation often considered stronger audit evidence compared to other methods?
- [ ] Because it saves time for the client.
- [x] Because it requires the third party to respond, ensuring verification.
- [ ] Because it is easier to administer.
- [ ] Because it involves fewer entities.
> **Explanation:** Positive confirmation is considered stronger audit evidence because it requires the third party to respond, ensuring the auditor can verify the information directly from those external sources.
### What would an auditor typically do if no response is received from a positive confirmation request?
- [ ] Assume the information is correct.
- [ ] Cancel the audit.
- [x] Perform alternative procedures to verify the information.
- [ ] Reduce the scope of the audit.
> **Explanation:** If no response is received from a positive confirmation request, the auditor would perform alternative procedures, such as inspecting subsequent cash receipts or shipment records to verify the transactions.
### Which of the following is NOT typically confirmed through a positive confirmation request?
- [ ] Customer account balances.
- [ ] Bank account balances.
- [x] Company floor plans.
- [ ] Loan principal amounts and interest due.
> **Explanation:** Positive confirmation requests are typically used to confirm customer account balances, bank account balances, and loan details, but not something irrelevant like company floor plans.
### In which scenario might an auditor prefer using positive confirmations?
- [ ] When there is minimal risk of financial misstatement.
- [x] When there is a higher risk of material misstatement.
- [ ] When account balances are insignificant.
- [ ] When time constraints prohibit detailed reviews.
> **Explanation:** Auditors prefer using positive confirmations when there is a higher risk of material misstatement or when account balances are critical to the overall financial statements.
### What constitutes substantive procedures in auditing?
- [ ] Administrative tasks.
- [x] Auditor activities to detect material misstatements.
- [ ] Client marketing efforts.
- [ ] Financial planning meetings.
> **Explanation:** Substantive procedures in auditing are auditor activities aimed at detecting material misstatements in the financial statements. Positive confirmations are part of these procedures.
### What main challenge might an auditor face when using positive confirmations?
- [ ] Understanding tax implications.
- [ ] Preparing financial statements.
- [x] Receiving timely responses from third parties.
- [ ] Understanding client’s internal controls.
> **Explanation:** The main challenge for auditors when using positive confirmations is receiving timely responses from third parties, which can prolong the audit process if follow-ups and alternative procedures become necessary.
### Which term is closely related to positive confirmation, but involves no obligation unless there is a discrepancy?
- [x] Negative Confirmation
- [ ] External Audit
- [ ] Internal Audit
- [ ] Compilation Report
> **Explanation:** Negative confirmation is closely related to positive confirmation, but it requires a response only if there is a discrepancy with the stated information.
### What is a significant advantage of using positive confirmations?
- [ ] It is quicker to administer.
- [ ] It provides subjective evidence for the auditor to interpret.
- [x] It ensures more reliable and substantial audit evidence.
- [ ] It minimizes the need for follow-up procedures.
> **Explanation:** The significant advantage of using positive confirmations is that they ensure more reliable and substantial audit evidence by requiring a response from third parties, which helps verify the accuracy of financial information.
Thank you for exploring the intricate process of confirmation positive in auditing through our comprehensive article and engaging quiz. Keep honing your auditing skills!
