Confirmation

Definition

In auditing, confirmation is a procedure used to obtain evidence through direct communication with third parties, verifying the accuracy of financial information. This method enhances the reliability of the evidence gathered by providing external validation of account balances and transactions, which is essential in assessing the integrity of financial statements.

5 Must Know Facts For Your Next Test

1. Confirmation can be either positive or negative; positive confirmation requests recipients to respond regardless of whether they agree with the information, while negative confirmation only requires a response if the information is incorrect.
2. Common areas where confirmation is applied include accounts receivable, bank balances, and inventory existence, providing auditors with reliable external evidence.
3. Auditors must evaluate the responses received during the confirmation process, determining their reliability based on factors such as source credibility and completeness.
4. Confirmation helps to reduce detection risk by providing auditors with evidence that is independent from the entity being audited.
5. The use of electronic confirmations has become more prevalent, allowing for quicker responses and improved efficiency in obtaining evidence.

Review Questions

• How does confirmation enhance the reliability of evidence obtained during an audit?
  • Confirmation enhances the reliability of evidence by providing direct validation from independent third parties regarding account balances and transactions. This external corroboration minimizes reliance on internal records alone, which could be subject to error or manipulation. By incorporating confirmations into the audit process, auditors gain a higher level of assurance about the accuracy of the financial information presented.
• Discuss the differences between positive and negative confirmation in auditing and their respective uses.
  • Positive confirmation requires that the third party respond regardless of whether they agree with the reported information, making it more reliable but also potentially more burdensome. Negative confirmation, on the other hand, only asks for a response if there is disagreement, which makes it less costly and quicker but can lead to missed discrepancies if parties do not respond. Auditors choose between these methods based on their assessment of risk and the nature of the information being confirmed.
• Evaluate the impact of electronic confirmations on the efficiency and effectiveness of the audit confirmation process.
  • The introduction of electronic confirmations significantly impacts both efficiency and effectiveness in the audit process. By facilitating faster communication and responses from third parties, electronic confirmations reduce the time auditors spend waiting for replies. Additionally, they often lead to higher response rates since they are more convenient for recipients. However, auditors must still assess the reliability of electronic responses compared to traditional methods to ensure that they meet professional standards for gathering sufficient evidence.

Related terms

Reconciliation:

The process of comparing two sets of records to ensure consistency and accuracy, often involving financial statements and internal records.

Sampling: A technique used in auditing to select a representative subset of items from a larger population for testing, ensuring that conclusions can be drawn about the whole.

Assertions: Claims made by management regarding the accuracy and completeness of financial statements, which auditors test for validity during an audit.