International Standard Audit 505 & "External Confirmations
The international standard of audit 505 should be read in the context of MCA 200 "General objectives of an independent auditor and conducting an audit in accordance with international auditing standards."
This International Standard on Auditing (MCA) considers the use by the auditor of the procedures for obtaining external confirmations as audit evidence in accordance with the requirements of MCA 330 and MCA 500. It does not consider requests for litigation and claims. The issues of obtaining sufficient appropriate audit evidence through such requests are discussed in MCA 501.
The MCA 500 says that the reliability of audit evidence is influenced both by the source of the evidence and by the nature of the evidence, as well as the specific circumstances in which the evidence was obtained. This MCA also contains the following generalizations applicable to audit evidence:
• audit evidence is more reliable if it is obtained from external sources;
• the audit evidence obtained directly by the auditor is more reliable than that obtained not directly or through an intermediary;
• the audit evidence is more reliable if it exists in a documentary form, paper, electronic, or otherwise.
Depending on the circumstances of the audit, the audit evidence in the form of external confirmations received directly by the auditor from third parties may prove to be more reliable than the evidence generated within the organization.
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Other MCAs recognize the importance of external evidence as audit evidence, for example: MCA 330 considers the auditor's responsibility for developing and applying a response to the assessed risks of material misstatement, it requires that the auditor obtains more convincing audit evidence, the higher his assessment of the level of audit risk . MCA 240 indicates that the auditor may develop confirmation requests to obtain additional supporting information in response to risks of material misstatement due to fraudulent actions at the level of management's assertions in the financial statements. The MCA 500 indicates that the supporting information received from a source independent of the audited organization, such as external confirmations, can increase the auditor's confidence in the evidence obtained on the basis of existing accounting records or management statements.
The auditor's objective in applying external confirmation procedures is the development and implementation of these procedures in order to obtain appropriate and reliable audit evidence.
The following terms are used for MCA purposes:
External confirmation - audit evidence received in the form of a direct written response to the auditor from a third party (confirming party) in paper, electronic or other form.
A request in the form of a positive confirmation - a request that the confirming party directly confirms to the auditor that it or agrees, or does not agree with the information contained in the request, or provides required information.
A request in the form of a negative confirmation is a request to which the confirming party directly responds to the auditor only if it does not agree with the information contained therein.>
No response - no third party confirmation in response to a request, or incomplete confirmation, or a request returned to the sender.
Exceptions is the answer indicating the difference between the requested verified information or information contained in the organization's records and information provided by the confirming party.
When using procedures for obtaining external confirmations, the auditor is obliged to control the requests for external confirmation:
• Definition of information that requires confirmation or requested (see section A1);
• selection of a proper confirmatory third party (see A2);
• Development of requests for confirmation, including the determination of proper addressing of requests and that requests contain information on how to direct responses directly to the auditor (see A3-A6);
• Sending requests, reminders, if appropriate, to the confirming party (see A7).
If the management refuses the auditor to issue requests for external confirmation, the auditor is obliged:
• inquire about the reasons for this refusal and consider the audit evidence that the refusal is reasonable and reasonable;
• Evaluate the consequences of failure to assess the risk of significant distortion and the risk of fraud, the nature, timing and extent of other audit procedures by the auditor;
• perform alternative audit procedures designed to obtain reliable audit evidence.
If the auditor concludes that management's refusal to issue requests for external confirmation is unreasonable or if the auditor is unable to obtain reliable audit evidence based on alternative procedures, it is also required to determine the implications for the audit and the audit opinion expressed in accordance with MCA 705.
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Negative confirmations present less reliable audit evidence than positive ones.
The auditor is obliged to assess whether the procedures for obtaining external confirmations have been provided with reliable evidence or whether further audit procedures are necessary.
The procedures for obtaining external confirmations are often performed in order to confirm or request information regarding balance accounts and their elements.
The responses to the confirmation requests provide the most adequate and reliable audit evidence when sent to the confirming party, which, in the auditor's opinion, has the necessary knowledge of the information to be confirmed.
Factors to consider when developing a query form include:
• statements for which a request is being prepared;
• Specific identified risks of material misstatement, including the risks of fraudulent actions;
• Draft and presentation of the request for confirmation;
• past experience but audit of similar tasks;
• the way the message is sent (for example, in paper form, using electronic or other means of communication);
• approval by management of the organization or recommendations from them to third parties to send a response to the auditor. The confirming parties may want to respond only to a confirmation request containing approval by the management of the organization;
• The ability of the confirming party to provide confirmation or provide the requested information (for example, to confirm a specific amount for the invoice that is included in the balance sheet account).
Request for positive external confirmation contains a request to the confirming party in any case to respond to the auditor, indicating either consent to the information provided in the request, or by providing the requested information. Verifying that requests are properly addressed includes checking the proper nature of all or some of the addresses to which requests are sent before they are sent.
The auditor may send an additional confirmation request if he does not receive a response within a reasonable period of time. For example, after checking the accuracy of the address of the initial request, the auditor can send an additional request.
The management's refusal to allow the auditor to send a request for external confirmations is a limitation on the amount of evidence that the auditor intends to receive.
The auditor may conclude on the basis of the conclusions in accordance with the paragraph that it will be appropriate to revise the assessment of the risks of material misstatement at the level of approvals and modify the planned audit procedures in accordance with MCA 315.
The MCA 500 indicates that circumstances that affect the reliability of information can arise even when audit evidence is obtained from sources external to the organization.
ISA 500 (edited) requires the auditor to determine whether procedures should be modified in order to verify the reliability of the information used as audit evidence.
The response to a confirmation request may contain statements restricting its use. The presence of such restrictions does not necessarily reduce the reliability of the answer as an audit evidence.
When the auditor concludes that the answer is unreliable, he may need to reassess the risks of material misstatement at the level of assertions in the financial statements and modify the planned audit procedures as required by MCA 315. For example, an unreliable response may indicate the presence of a fraud risk factor , which requires evaluation in accordance with MCA 240.
With no answer , the auditor can perform alternative audit procedures:
• for balance indicators of accounts receivable - study of payment documents, documentation of delivery and sales in the period closer to the reporting date;
• for balance sheet indicators of accounts of creditors - study of relevant data on transfers of funds or correspondence with third parties and other records, for example, certificates of receipt of funds by the counterparty.
Failure to respond to a negative confirmation request does not imply an unambiguous response of the requested party to a directed request or to confirm the accuracy of the information contained in the request.
When evaluating the results of answering requests for external confirmation, the auditor can divide them into the following categories:
• a response from an appropriate confirming party that indicates agreement with the information provided or provides the requested information without exceptions;
• the answer looks unreliable;
• the answer is not presented;
• an answer with an exception.
The evaluation of the responses by the auditor, along with other procedures that the auditor can perform, will help him in forming the conclusion whether he has received sufficient appropriate audit evidence or if additional audit procedures are required, as required by the MCA 330.
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