Audit Confirmations

May 12, 2015

If your company is audited by an independent CPA and you are involved in the audit process, you are likely familiar with audit confirmations. When confirmation procedures are performed, you might think to yourself, “why does my auditor have to confirm this information with a third party, don’t they trust me?” A lack of trust is not the case at all. An audit confirmation is a common test that is performed in the completion of most audits.

According to AU Section 330 from the Public Company Accounting Oversight Board, a confirmation “is the process of obtaining a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions.” It is important to note in this definition that the communication should be directly between the auditor and the third party, excluding the auditee. This ensures that the auditor receives the information as it was originally provided by the responding third party and that the information was not tampered with.

The responding third party could be a variety of people, including but not limited to a bank, a vendor or a customer, depending on the type of confirmation being completed. The most common types of confirmations are for cash accounts, debt, accounts receivable and accounts payable, though confirmations can be customized to confirm almost any financial statement assertion that is made.

shutterstock_87621601Historically, confirmations have always been sent in the mail between auditors and third parties, but in 2007 auditing standards allowed the use of electronic confirmations. The predominate electronic confirmation service provider is is used by a majority of the national and regional banks in the United States, including Huntington, PNC, Fifth Third, Key Bank and Wells Fargo, to name a few. There are several benefits to using electronic confirmations over paper confirmations. The main benefits are that electronic confirmations have higher response rates, have quicker turnaround times and are easier for the bank to complete.

When a confirmation is received by the auditor and it matches the information provided by the auditee, it provides the auditor a level of comfort that the information is correct. This level of comfort is required for the auditor to ultimately sign the report on the financial statements. If there are differences on the returned confirmation, the auditor will follow up with the auditee, and likely the third party, to reconcile the differences. If a confirmation is not returned from the third party, the auditor will have to perform alternative procedures to come to this same level of comfort. These alternative procedures will likely take significantly longer than the process of sending and receiving confirmations.

So when your auditor sends confirmations to third parties, it is not because they don’t trust you, it is just the most efficient audit procedure to test the information provided following the auditing standards generally accepted in the United States of America.

By: Mark Swayer, CPA

Categories: Audit & Accounting