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PCAOB Proposes New Auditing Standard on Confirmation

Jul 15th 2010
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The PCAOB announced on July 13 they approved for public comment a proposed audit standard on confirmations.  Per the PCAOB website, the proposed standard would strengthen the current auditing standard, AU Sec. 330, The Confirmation Process.

My opinion on this:  Big deal.  I've been auditing for a long time, and I really don't put a lot of stock in the confirmation process, and here is why:

Bank confirmations - I have one audit where almost every year the bank messes up the bank confirmation.  I'd much prefer to just log into bank websites and see what the balance was.  You can observe that process and see that it is genuine. 

That takes care of Item 1 of a standard bank confirmation.  When was the last time you had a bank accurately answer Line 2 (client was directly liable to the bank for the following).  Not often.  I'd rather not incorrectly place reliance on the bank leaving that one blank.

Accounts receivable - I've never thought an accounts receivable confirmation was worth more than seeing the actual money in the bank.  Money in the bank is less likely to be fraudulent than a confirmation.  Yes, the auditor controls the confirmation process in that we mail the confirmation.  But that does little to prevent possible tampering by a dishonest customer colluding with the company.

I like receivable confirmations even less on bill and hold receivables (not that I like bill and hold receivables). 

Inventories - I'm somewhat ok on them in terms of confirming quantities, but I'd much prefer seeing it myself.  When I see it I can see if it really exists, what condition it is, whether there is a layer of dust on it - all those things you learn about in your college auditing class.

Accounts payable - I never send them.  Never.  I can not justify the effort.  This bias goes back to when I worked at Deloitte a long time ago.  I have always considered subsequent disbursement testing much more effective.

Are there any confirmations I like?  Debt confirmations tend to be reliable in my experience.  Legal confirmations, properly prepared, are very useful.

I will naturally comply with whatever the PCAOB says needs to be done.  I'm just not likely to be happy about it.


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