External confirmation

Question 1

When is it optional for auditor to use External Confirmation?

Answer 1

Inherent and control risk is accessed low.
Total balance is not material.
Evidence can be obtained from other substantive procedures.
Managment requests not to send confirmation request and there is reasonable justification.

Question 2

Audit procedures when using, designing and planning confirmation request.

Answer 2

1-Decide following:
timing, appropriate confirming parties, information to be requested, type of confirmation.
2-obtain signature of authorized representative and send letters.
3-Appropriate procedures should be performed on replies.
4-Preparation of Summery and reaching the conclusion.

Question 3

Procedures to be performed on year end, if confirmation is send at interim date?

Answer 3

Following additional procedures should be performed:
1- compare individual balances at year end with balances at interim date, and investigate unusal variations.
2- For Transactions between interim date and final date:
a- select a sample of transactions, and perform test of controls to ensure operating effectivnes of control.
b-select a sample of material transactions and perform test of details to esure that these are not materially misstated.
3- Send confirmations letter also at year end (if necessary)

Question 4

Factors to be considered Deciding Type of confirmation.

Answer 4

Negative confirmation can be used only if all of following conditions are met.
1-Relevant population consists of large number of small balances.
2- Inherent and control risk are low and auditor has obtained evidence about operating effectiveness of controls
3-A very low exception rate is expected, and
4- Auditor is not aware of any circumstances that confirming party will disregard such requests.

Question 5

Which one is more reliable positive confirmation or negative confirmation?

Answer 5

Negative confirmation is less reliable:
1- There is no explicit evidence that confirming party recieved and verified confirmation. Confirmation may be lost or disregareded.

Question 6

Differentiate positive and negative confirmation?

Answer 6

Positive confirmation:
Requests ask confirming party to reply auditor in all cases whether he agrees or disagrees with the information provided in the request.
Negative confirmation:
Requests ask confirming party to reply auditor only if he disagress with the information provided in the request.

Question 7

Procedures for following?
1-A response indicating Agreements.
2-A response inidicating Exception/Disagreement

Answer 7

A response indicates Agreement, it forms sufficeint appropriate audit evidence. No further Work is required.

A response indicates Disagreement, Auditor shall ask client to reconcile the balances in its records with balances confirmed by the parites.
Reconciliation prepared by client, should be checked by auditor to determine whether this exception is because of :
- timing difference. or
- misstatment in records of client, or
-misstatment in records of confirming party.

If Exception is indicative of weakness in internal control or fraud, auditor shall also increase risk of material misstatment.

Question 8

If No Response(ie We are unable to confirm amount) from Confirming party?

Answer 8

Positive or Negative Confirmation:
If Negative, It means he Agrees, No further work is required.

If Positive, For Debtors and Creditros Auditor shall perform alternative Audit Procedures.
For Banks and Lawyers, Scope Limitations, Alternative procedures are not Acceptable as risk is high.

Question 9

If response is oral (ie through telephone)

Answer 9

1-Auditor shall request confirming party to confirm balance in writing because oral representation does not meet the defination of confirmation letter.
2-If written Response is not received, this is same as non response and the Auditor shall perform Alternative Audit Procedures.