Clarified Auditing Standards: External Confirmations (AU-C Section 505) – Part 1by
The principal auditing standard specifically applicable to accounts, loans, and notes receivable is External Confirmations (AU-C Section 505). Some of the key issues in this clarified auditing standard include:
- The requirement to confirm accounts receivable to obtain relevant and reliable audit evidence.
- The relationship of audit risk to confirmation procedures (i.e., more evidence is required when risk is higher).
- Control over the confirmation process is necessary for confirmations to be reliable; electronic confirmations are discussed.
- Guidance on how to perform alternative procedures.
- Guidance on how to evaluate confirmation results.
Changes From Previous Standard (SAS No. 67)
Here is a summary of changes from the previous standard made in AU-C Section 505:
1. It does not change practice in any significant respect.
2. To reflect a more principles-based approach to standard-setting, certain requirements that are duplicative of broader requirements in SAS No. 67 have been moved to application and other explanatory material, consistent with International Standards on Auditing (ISA) No. 505. In the Auditing Standards Board's (ASB) view, this has not changed the overall effectiveness of the clarified SAS.
3. Most significant changes to the previous standard are as follows:
a) Responsibilities of the auditor when management refuses to allow the auditor to send a confirmation request. These responsibilities include inquiries as to reasons for the refusal, evaluating alternative procedures, and impact on the risk assessment. When and if the auditor concludes that management's refusal is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor should communicate the matter to those charged with governance.
b) Added application material to the SAS regarding the use of oral responses to confirmation requests as audit evidence.
(1) It clarifies that the receipt of an oral response to a confirmation request does not meet the definition of an external confirmation.
(2) Provides guidance on how the response may be considered part of alternative procedures performed in order to obtain sufficient appropriate audit evidence. (The primary impact of this change is on the reliability of evidence and how it is presented in the auditor's summary of confirmation statistics. An oral response would normally be considered and alternative procedure for evidence purposes.)
(3) The definition of confirmation has been changed.
(a) The ASB has expanded the ISA definition of an external confirmation to include direct access by the auditor to information held by a third party. (This type of evidence would be considered a confirmation on the summary of confirmation statistics.)
(b) Third-party involvement is increasingly common, and the ASB believes that the inclusion of this concept clarifies the definition.
(c) The ASB believes this clarification is an improvement to the ISA definition because it specifically addresses a situation that is becoming increasingly common, and this change to the ISA definition is not inconsistent with the intent of the International Auditing and Assurance Standards Board's definition.
Part 2 of this article will focus on performing the confirmation process for accounts receivable and the effects of risk of material misstatement on the nature, extent, and timing of confirmation procedures.
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