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PSA 505, External Confirmations

External confirmation – Audit evidence obtained as a direct written response to the auditor from a third party
(the confirming party), in paper form, or by electronic or other medium.

Positive confirmation request – A request that the confirming party respond directly to the auditor indicating
whether the confirming party agrees or disagrees with the information in the request, or providing the
requested information.

Blank confirmation – A positive confirmation that does not state the amount (or other information) on the
confirmation request, and asks the confirming party to fill in the amount or furnish other information.

Negative confirmation request – A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request.

Non-response – A failure of the confirming party to respond, or fully respond, to a positive confirmation
request, or a confirmation request returned undelivered.

Exception – A response that indicates a difference between information requested to be confirmed, or

contained in the entity’s records, and information provided by the confirming party.

External confirmation procedures:

The auditor shall maintain control over confirmation requests, including:

a. Determining the information to be confirmed/requested
b. Selecting the appropriate confirming party
c. Designing the confirmation requests, including determining that these are properly addressed and
contain return information for responses to be sent directly to the auditor

 Design of confirmation requests may affect the response rate and its reliability, example:

o About reliability:
 Positive confirmation is expected to provide more reliable evidence than a
negative confirmation
 Blank confirmation may provide more reliable evidence than a non-blank
positive confirmation because in the latter, the confirming party may reply to
the request without verifying that the information is correct.

o About response rate:

 Blank confirmation may result in lower response rate because additional
effort is required of the confirming party.

d. Sending the requests, including follow-up requests, when applicable, to the confirming party

Management’s Refusal to Allow the Auditor to Send a Confirmation Request

If management refuses to allow the auditor to send a confirmation request, the auditor shall:
1. Inquire as to reasons for refusal; seek audit evidence as to their validity and reasonableness;
o Example: Ongoing legal dispute or negotiation whose resolution may be affected by untimely
confirmation request

2. Evaluate the implications of management’s refusal on the auditor’s risk assessment, including fraud
risk, and on the NTE of other audit procedures
o Example: possible need to increase risk assessment or modify planned substantive tests)

3. Perform alternative audit procedures, such as:

o For Accounts Receivable
 Examine subsequent cash receipts
 Examination of documents - shipping documentation and sales near the period-end
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o For Accounts Payable

 Examine subsequent cash disbursements
 Examination of documents – correspondence from third parties, and other records,
such as receiving reports

If management’s refusal is unreasonable, or the auditor is unable to obtain relevant and reliable audit
evidence from alternative audit procedures, the auditor shall
1. Communicate with those charged with governance in accordance with PSA 260
2. Determine the implications for the audit and the auditor’s opinion (consider need to modify opinion due
to scope limitation)

Results of the External Confirmation Procedures

Reliability of Responses to Confirmation Requests

Factors that may indicate doubts as to reliability of responses to confirmation requests:

1. Received by the auditor indirectly
2. Appeared not to have come from the originally intended confirming party

If there are doubts as to the reliability of the response to a confirmation request, the auditor shall obtain further
audit evidence to resolve those doubts.
o Example: Verify the source and contents of the response by contacting the confirming party.

Oral response
o On its own, this does not meet the definition of external confirmation. However, upon obtaining oral
response, the auditor may request the confirming party to respond in writing directly to the auditor.

If a response to a confirmation request is not reliable, the auditor shall evaluate the implications on the
assessment of the risks of material misstatement, including fraud risk, and on the related NTE of other audit
procedures.

Non-Responses
 In the case of each non-response, the auditor shall perform alternative audit procedures:
o Accounts Receivable
 Examine subsequent cash receipts
 Examine documents -shipping documentation and sales near the period-end
o Accounts Payable
 Examine subsequent cash disbursements
 Examine documents -correspondence from third parties, other records, e.g. receiving
reports

 Non-response may indicate a previously unidentified risk, therefore, consider the need to revise risk
assessment and modify procedures.

 In some cases, auditor may determine that a response to a positive confirmation request is
necessary (alternative audit procedures is not enough), for example in case of collusion among
employees and management and corroborative information is available only externally.

If the auditor does not obtain such confirmation, the auditor shall determine the implications for the
audit and the auditor’s opinion

Exceptions
The auditor shall investigate exceptions to determine whether or not they are indicative of misstatements.
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Negative Confirmations
 Provide less persuasive audit evidence than positive confirmations because of possible incorrect
interpretation of non-response.

 Shall not use negative confirmation requests as the sole substantive audit procedure to address an
assessed risk of material misstatement at the assertion level unless all of the following are present:

1. The auditor has assessed the risk of material misstatement as low and has obtained sufficient
appropriate audit evidence regarding the operating effectiveness of controls relevant to the
assertion;
2. The population of items subject to negative confirmation procedures comprises a large number of
small, homogeneous, account balances, transactions or conditions;
3. A very low exception rate is expected; and
4. The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.

 Difficulty in interpreting non-response

 Confirming party may be more likely to respond indicating their disagreement with a confirmation
request that are not in their favor (e.g. payables confirmation that is understated) and less likely to
respond to a request that are in their favor (payables confirmation that is overstated).

Evaluating the Evidence Obtained

The auditor shall evaluate whether the results of the external confirmation procedures provide relevant and
reliable audit evidence, or whether performing further audit procedures is necessary.
 Auditor may categorize results as
o Responses indicating agreement
o Responses deemed unreliable
o Non-response
o Responses indicating exceptions
 Auditor may take into account other audit procedures in concluding whether sufficient appropriate
evidence has been obtained or whether additional procedures is necessary.
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