IntroductionIntroduction

Introduction

4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on the auditor’s use of external confirmations as a means of obtaining audit evidence.

5 The auditor shall determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level. In making this determination, the auditor shall consider the assessed risk of material misstatement at the assertion level and how the audit evidence from other planned audit procedures will reduce the risk of material misstatement at the assertion level to an acceptably low level.

6 ASA 500 Audit Evidence, states that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained. It indicates that, while recognising exceptions may exist, the following generalisations about the reliability of audit evidence may be useful:

• Audit evidence is more reliable when it is obtained from independent sources outside the entity.
• Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.
• Audit evidence is more reliable when it exists in documentary form.
• Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles.

Accordingly, audit evidence in the form of original written responses to confirmation requests received directly by the auditor from third parties who are not related to the entity being audited, when considered individually or cumulatively with audit evidence from other audit procedures, may assist in reducing the risk of material misstatement for the related assertions to an acceptably low level.

7 External confirmation is the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the financial report or related disclosures. In deciding to what extent to use external confirmations, the auditor ordinarily considers the characteristics of the environment in which the entity being audited operates and the practice of potential respondents in dealing with requests for direct confirmation.

8 External confirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. For example, the auditor may request external confirmation of the terms of agreements or transactions an entity has with third parties. The confirmation request is designed to ask if any modifications have been made to the agreement, and if so what the relevant details are. External confirmations may also be used to obtain audit evidence about the absence of certain conditions, for example, the absence of a “side agreement” that may influence revenue recognition. Other examples of situations where external confirmations may be used include the following: