Confirmation

Definition

The term “confirmation” in accounting refers to a procedure used by auditors to verify the accuracy of a client’s financial statements through direct communication with third parties. These third parties provide independent verification of the transactions and balances reported by the client. This technique helps auditors ensure the reliability of financial information and detect potential discrepancies or fraud.

Examples of Confirmations

Bank Confirmation:
- An auditor may contact a bank to verify a client’s account balances and any outstanding loans or obligations.
Customer Accounts Receivable Confirmation:
- An auditor could send letters to a company’s customers requesting confirmation of the amounts owed to the company as of a certain date.
Supplier Accounts Payable Confirmation:
- An auditor might reach out to suppliers to confirm the amounts that the client owes for goods and services received but not yet paid.

Frequently Asked Questions (FAQs)

What is the purpose of using confirmation in an audit?

Answer: The primary purpose of using confirmation is to obtain independent and reliable evidence about the accuracy of the information presented by the client, thereby enhancing the credibility and reliability of the financial statements.

How do auditors choose which accounts to confirm?

Answer: Auditors typically select accounts with high balances or those with irregular or unusual transactions. They may also focus on accounts that are deemed to be at higher risk of error or fraud.

What are positive and negative confirmations?

Answer: Positive confirmations require the recipient to respond directly whether they agree or disagree with the information provided. Negative confirmations request a response only if the recipient disagrees with the information stated.

Are confirmations mandatory for all audits?

Answer: The necessity of confirmations varies depending on the audit’s scope and the auditor’s judgment, considering factors such as the nature of the client’s business and the risk assessment conducted.

How is the reliability of a confirmation ensured?

Answer: The reliability of a confirmation is ensured by sending requests to independent, third-party sources and by verifying that the responses are returned directly to the auditor.

What is circularization of debtors?

Answer: Circularization of debtors is a form of confirmation used to verify accounts receivable by contacting the debtors and confirming the amounts they owe to the company being audited.

How does bank confirmation work?

Answer: Bank confirmation involves an auditor sending a formal request to a client’s bank to verify account balances, loan amounts, and other relevant financial information.

What challenges are associated with obtaining confirmations?

Answer: Challenges include non-responsiveness from third parties, incomplete or inaccurate responses, and potential delays in receiving confirmation replies.

How do auditors handle non-responses to confirmation requests?

Answer: Auditors may need to perform alternative procedures, such as examining subsequent cash receipts, reviewing contractual agreements, or using internal records, to gather sufficient evidence.

Can electronic confirmations be used?

Answer: Yes, electronic confirmations are increasingly being used due to their efficiency and reduced risk of tampering compared to paper-based confirmations.

Bank Confirmation: A type of confirmation that verifies a client’s banking data directly with the bank.
Circularization of Debtors: Sending out requests to a company’s debtors to confirm outstanding balances.
External Confirmation: Obtaining evidence directly from a third party rather than from within the client’s organization.
Positive Confirmation: A request that requires the respondent to reply whether they agree or disagree with the provided information.
Negative Confirmation: A request that asks the respondent to reply only if they disagree with the information.

Online Resources

Suggested Books for Further Studies

“Principles of Auditing & Other Assurance Services” by Ray Whittington and Kurt Pany - This book provides comprehensive coverage of auditing concepts and methods including confirmation.
“Auditing and Assurance Services: An Integrated Approach” by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley - This text integrates both principles and techniques of auditing, including the usage of confirmations.
“Auditing: A Risk-Based Approach to Conducting a Quality Audit” by Karla Johnstone-Zehms, Audrey Gramling, and Larry Rittenberg - Focuses on risk assessment and the importance of obtaining high-quality audit evidence.

Accounting Basics: Confirmation Fundamentals Quiz

### What is the main objective of using confirmation in an audit? - [ ] To estimate a client's future income - [x] To obtain reliable third-party evidence - [ ] To prepare a company's financial statements - [ ] To manage a client's internal accounts > **Explanation:** The main objective of using confirmation in an audit is to obtain independent, reliable evidence from third parties to verify the accuracy of information provided by the client. ### What type of confirmation requires a response only if the recipient disagrees with the information? - [ ] Positive Confirmation - [x] Negative Confirmation - [ ] Conditional Confirmation - [ ] Automatic Confirmation > **Explanation:** Negative confirmations require a response only if the recipient disagrees with the information provided, whereas positive confirmations require a response regardless of agreement. ### Why might auditors prefer using positive confirmations over negative confirmations? - [x] Positive confirmations generally provide more reliable evidence - [ ] Positive confirmations are faster to process - [ ] Positive confirmations cost less than negative confirmations - [ ] Positive confirmations are less invasive > **Explanation:** Positive confirmations generally provide more reliable evidence because they require a response, whether in agreement or disagreement, thereby ensuring higher validity. ### Which term describes contacting a company’s debtors to confirm amounts owed? - [ ] Bank Confirmation - [x] Circularization of Debtors - [ ] Supplier Confirmation - [ ] Asset Confirmation > **Explanation:** Circularization of debtors involves contacting a company's customers or debtors to confirm the amounts they owe, verifying the accounts receivable. ### How do auditors handle non-responses to confirmation requests? - [ ] Ignore them and proceed with the audit - [x] Perform alternative audit procedures - [ ] Inflate the confirmed balance - [ ] Cancel the audit engagement > **Explanation:** When confirmation requests go unanswered, auditors may need to perform alternative audit procedures, such as verifying cash receipts, reviewing contracts, or relying on internal records to gather sufficient evidence. ### Bank confirmations are typically used to verify which type of client information? - [x] Account balances and loans - [ ] Inventory levels - [ ] Employee salaries - [ ] Marketing expenses > **Explanation:** Bank confirmations are primarily used to verify clients’ account balances, loans, and other related financial information held by the bank. ### What is one of the significant challenges associated with obtaining confirmations? - [ ] Overloading the auditor with responses - [ ] Decreasing audit costs - [ ] Increasing scope sizes - [x] Non-responsiveness from third parties > **Explanation:** One significant challenge in obtaining confirmations is non-responsiveness from third parties, which can delay the audit process and require the use of alternative procedures. ### Can electronic confirmations be as reliable as traditional paper-based confirmations? - [x] Yes, they can be reliable - [ ] No, they are less reliable - [ ] Only for large corporations - [ ] Not applicable for financial statements > **Explanation:** Electronic confirmations can be as reliable as traditional paper-based confirmations, provided they are securely managed and verifiable, offering efficiency and reducing tampering risks. ### What might an auditor do if the confirmation reveals a discrepancy between the client’s records and the third-party information? - [ ] Ignore the discrepancy - [ ] Automatically adjust the financial statements - [x] Investigate the reason for the discrepancy - [ ] Terminate the audit > **Explanation:** If a discrepancy is found between the client’s records and third-party confirmation, the auditor should investigate the reason behind the discrepancy to determine its cause and the appropriate course of action. ### Who typically responds to a bank confirmation request? - [x] Bank officials - [ ] The client’s financial department - [ ] Company auditors - [ ] Tax authorities > **Explanation:** Bank officials typically respond to bank confirmation requests, providing necessary information regarding the client’s account balances, loans, and other banking transactions.

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