What is the purpose of confirmation letter when it comes to the audit of receivables?

Auditors commonly use confirmations to verify such items as cash, accounts receivable, accounts payable, employee benefit plans and pending litigation. Under U.S. Generally Accepted Auditing Standards, an external confirmation is “a direct response to the auditor from a third party either in paper form or by electronic other means, such as through the auditor’s direct access to information held by a third party.”

Some companies may be put off when auditors reach out to customers, lenders and other third parties — and sometimes confirmation recipients fail to respond in a timely, complete manner. But confirmations are an important part of the auditing process that you’ll better appreciate if you learn more about them.

Three formats

The types of confirmations your auditor uses will vary depending on your situation and the nature of your organization’s operations. Confirmations generally come in the following three formats:

1. Positive. Recipients are requested to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.

2. Negative. Recipients are requested to reply directly to the auditor only if they disagree with the information presented on the confirmation.

3. Blank. The amount (or other information) isn’t stated on this type of request. Instead, it requests recipients to complete a blank confirmation form.

Confirmation procedures may be performed as of a date that’s on, before or after the balance sheet date. If the procedures aren’t performed as of the balance sheet date, the account balance will need to be rolled forward (or backward) to the balance sheet date.

Mailed vs. electronic forms

In the past, auditors sent out confirmation letters through the U.S. Postal Service. Then, they waited to receive written responses from their audit clients’ customers, suppliers, banks, benefits plan administrators, attorneys and others. This was a cumbersome process. If an auditor failed to receive an adequate level of response, follow-up confirmation letters could be sent, which could lead to delays in the audit process. Alternatively, the auditor could contact nonresponding recipients by phone or in person. Otherwise, the auditor would need to perform alternative procedures.

Although written confirmations are still permitted, auditors routinely use electronic confirmations today. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider.

Electronic confirmations can be considered reliable audit evidence. Plus, they overcome some of the shortcomings of written confirmations. That is, they’re sent and received instantaneously at no cost, and the electronic confirmation process is generally secure, minimizing the risks of interception or alteration. As a result, some financial institutions no longer respond to paper confirmation requests and will respond only to electronic confirmation requests.

Let’s work together

External confirmations can be a simple and effective audit tool. Contact us if you have questions about how we plan to use confirmations during your next audit or if you have concerns about the efficacy or security of the confirmation process.

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Several procedures are used by auditors to verify the dollar amounts included in your financial statements: original source documents, comparing financial trends from prior years, and often reach out to third parties — such as customers and lenders — to verify that unpaid balances and business estimates agree with company records. We’ve outlined some details about the confirmation process below: 

Audit confirmations are used when:

Third-party confirmations received directly by the auditor from external sources are considered more reliable than evidence generated in-house by your company. Auditors often send paper or electronic requests to customers to verify accounts receivable and to other financial institutions to confirm outstanding promissory notes. They also may choose to investigate cash transactions, inventory records, and consigned merchandise as well as long-term contracts, accounts payable and contingent liabilities, and any unusual transactions.

Before finishing audit procedures, a letter is sent to your attorney, confirming whether the information provided about any pending legal actions are both accurate and complete. Your attorney’s response will determine whether any pending litigation will have a material impact on the company’s financial statements.

A few types of confirmations:

Different types of audit confirmations exist for the varied nature of financial situations and the nature of your company’s operations. There are three basic types of confirmations:

1. Positive. This confirmation format asks recipients to reply directly to the auditor and to clarify with a positive statement regardless of whether they agree or disagree with the financial information included.
2. Negative. This type asks recipients to reply directly to the auditor only if they disagree with the information presented on the confirmation.
3. Blank. This type doesn’t state the amount or any other specific details on the request itself. Instead, recipients are asked to complete the form and return it directly to the auditor.

Some banks and financial institutions have chosen to no longer respond to confirmation letters mailed through the USPS. Instead, they respond only to electronic requests. These email requests may be made directly to the respondent or sent through a third-party provider.

Can you do something to assist?

The answer is yes! Approving the auditor’s requests in a quick, efficient manner can speed up the confirmation process. However, there may be situations when you object to the use of confirmation procedures. If this happens, discuss the matter with and provide corroborating evidence to your auditor. If your auditor feels the reason for the refusal is valid, they will apply alternative procedures and possibly ask for exclusive representation with management regarding the reasons for not confirming.

Auditors also might include your staff during the confirmation process. They may ask about recipients who aren’t responding to requests or other discrepancies found during the confirmation process. Your staff can help the audit team determine whether a misstatement in responses has occurred — and adjust the financial reports accordingly.

Audit confirmations can be a powerful tool.

Confirmations can both the quality and efficiency of the audit. JLK Rosenberger works with our clients to ensure the confirmation process goes smoothly. If the experience with your auditor has not been smooth, please call us at 818-334-8645 or click here to contact us. We’d be happy to discuss how our audit process can alleviate some of the burden placed on you and your staff.