SA 505 Revision | CA Inter Audit | CA Shubham Keswani (AIR 8)

Summary

This transcript provides an in-depth explanation of external confirmation procedures in auditing, focusing on the steps, requirements, and methods of communication involved. It covers key aspects like the need for auditor control, management authorization, and choosing the appropriate party for confirmation requests. The transcript discusses how to handle different types of confirmation requests (positive, blank, negative) and their associated risks and benefits. It also addresses potential challenges auditors may face when dealing with management and suppliers, as well as alternative audit procedures. The session concludes with a motivational note on confidence and effective learning.

Takeaways

• 😀 External Confirmation is an audit procedure used to verify whether the balances in an entity's financial statement match the balance reported by a confirming party.
• 😀 The confirmation must be a direct written response, and the auditor should obtain this confirmation from a third party (i.e., confirming party).
• 😀 The form of the confirmation can be either paper or electronic, with paper being more reliable as it is the original document.
• 😀 The auditor must maintain control over the external confirmation process and cannot delegate it.
• 😀 The process for external confirmation includes four key stages: determining the information to confirm, selecting the confirming party, ensuring proper authorization, and sending the request with a follow-up.
• 😀 It’s important to confirm not only account balances but also associated elements like agreements or contracts, especially when dealing with debtors and creditors.
• 😀 The design of a confirmation request is crucial; factors to consider include layout, presentation, and addressing the appropriate party with management's authorization.
• 😀 The audit may require alternative procedures if management refuses to send confirmation requests, such as checking subsequent receipts for debtors or payments for creditors.
• 😀 If alternative procedures still don't provide sufficient audit evidence, the auditor may need to modify the audit report in accordance with SA 705, based on the materiality of the risk.
• 😀 Negative Confirmation Requests (NCR) are used in cases where a response is only expected if the confirming party disagrees with the information, but they provide less persuasive evidence than positive confirmations.
• 😀 NCRs can be used effectively when the risk of material misstatement is low, the exception rate is minimal, and the confirming party is unlikely to disregard the request.

Q & A

What is the main focus of the audit procedure described in the transcript?

The main focus is on the use of external confirmation as an audit procedure to verify financial information from a third party, ensuring that balances and details match between the entity's books and the confirming party's records.

What does the term 'external confirmation' refer to in auditing?

'External confirmation' refers to obtaining audit evidence through a direct written response from a third-party source, such as a confirming party, to verify the accuracy of financial information, such as account balances.

Why is paper form generally considered more reliable than electronic form for external confirmations?

Paper form is considered more reliable because it is an original, documentary form, which is less likely to be altered or forged compared to electronic forms, which could potentially be manipulated.

What are the four stages of the external confirmation procedure as described in the transcript?

The four stages are: 1) Determine the information to be confirmed and requested, 2) Decide who to request the information from (confirming party), 3) Obtain management authorization for the process, and 4) Send the request and follow up as needed if there is no response.

What should an auditor do if management refuses to send an external confirmation request?

If management refuses, the auditor should first inquire about the reason. If the reason is valid and reasonable, the auditor can assess the risk of material misstatement. If the risk is significant, alternative audit procedures or modifications to the audit report may be necessary.

What is the importance of management authorization in the external confirmation process?

Management authorization is crucial because it ensures that the auditor has the necessary support to send confirmation requests to third parties. Without this authorization, the auditor may face difficulties obtaining responses from the confirming party.

What should an auditor do if the information provided by the confirming party is not reliable?

If the information is unreliable or if there are concerns about fraud or material misstatement, the auditor should perform additional procedures or tests to obtain more reliable audit evidence and potentially modify the audit report.

Can the auditor rely on external confirmation for all types of audit evidence?

No, the auditor cannot always rely solely on external confirmation. It is one of several tools used, and its effectiveness depends on the circumstances, such as the response rate and whether the confirming party verifies the information provided.

What is the role of the confirmation request design in the auditing process?

The design of the confirmation request is important to ensure it is clear, addresses the correct party, and includes accurate details. The auditor must also choose between positive and negative confirmation requests, depending on the reliability and risk involved.

What are the different types of confirmation requests mentioned in the transcript, and how do they differ?

The types of confirmation requests are positive confirmation (where the confirming party responds regardless of agreement) and negative confirmation (where the confirming party only responds if they disagree). The main difference is in the response expectations, with positive requests providing more reliable evidence but requiring more effort from the confirming party.