Important definitions

External confirmation—Its audit evidence obtained via direct confirmation from third parties like banks and vendors in written or digital format.

Positive confirmation request—This request requires the respondent to directly send confirmation to the auditor, regardless of whether they agree with the amount or not.

Negative confirmation request– It’s a request that requires the respondent to directly send confirmation to the auditor only if they do not agree on the balance.

No response– No reply from the respondent on the positive confirmation, or your request wasn’t delivered.

Objective

The objective of this ISA is to set requirements and provide guidance when sending external confirmation to obtain audit evidence.

Procedures to comply with ISA 505

Following are the requirements to be complied with for ISA 550.

• Spot information to be confirmed.
• Select the right parties to send the confirmation.
• Include appropriate return information for the response.
• Evaluate the information obtained.

If management does not allow direct confirmation

The following actions are to be considered in this case.

• Evaluate grounds/basis for the refusal.
• Evaluate the impact of refusal on the assessed risk of material misstatement.
• Plan alternative audit procedures.
• If you are unable to obtain sufficient and appropriate audit evidence, communicate the matter with those charged with governance and evaluate its impact on the audit report.

If there is no response to the confirmation request

No response to a positive confirmation request can be an alarming sign and lead the auditor to consider whether there is any impact of a lack of response on the audit opinion. Additionally, auditors can plan alternative audit procedures to obtain sufficient and appropriate audit evidence.

When can negative confirmation be used as the sole substantive procedure?

When auditors perform a test of control and their result is efficient operational effectiveness, very few or no differences are expected. In this case, negative conformation can be used as sole substantive procedure.

Wrap up

The objective of ISA 505 is to send external confirmation to cover the risk of material misstatement. The confirmation can be positive or negative. Positive confirmation requires the respondent to reply whether they agree with the information. On the contrary, negative confirmation requires a response only when there is disagreement on the information.

If the auditor does not receive confirmation, the auditor is required to plan alternate audit procedures and consider its impact on the audit report.