Confirmation Positive: Assurance through Direct Inquiry

August 25, 2024 3 min read Auditing Accounting Audits Confirmations Financial Accuracy Verification Accounting

A definitive written or oral request by the auditor of a party having financial dealings with the client about the accuracy of an item. A response is required regardless of whether the particular item is correct or incorrect. It is typically used to validate account balances and transactions.

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Confirmation Positive is a method used by auditors to verify the accuracy of financial information through a direct inquiry. Unlike other forms of confirmation, a response to this kind of confirmation is required regardless of whether the information provided by the client is accurate or not.

Definition and Purpose

A positive confirmation involves the auditor reaching out to a third party, typically one that has financial dealings with the client, to confirm the details of the financial transaction or balance. This enquiry might be presented in written or oral form, and a reply is mandatory from the contacted party, affirming the accuracy or highlighting discrepancies in the provided information.

Types of Confirmations

Positive Confirmations

Designed for High Assurance: As they ensure that every contacted party responds, they provide high assurance on the accuracy of the financial information.
Detailed Information Verification: Often used to verify details such as account balances, loan agreements, or transaction terms.

Negative Confirmations

Less Assurance Required: Unlike positive confirmations, these do not require a response unless there is a discrepancy with the recorded information.
Cost-Effective for Bulk Confirmations: These are more cost-effective and commonly used when the risk of material misstatement is low.

Special Considerations

Applicability to Auditing Standards

Confirmations are an essential part of compliance with auditing standards (e.g., International Standards on Auditing (ISA) 505 and AICPA standards in the U.S.). They help in ensuring the integrity and reliability of the financial statements presented by the client.

Selection of Audit Evidence

Auditors often choose positive confirmations when the accuracy of the financial statement items cannot be independently confirmed by other auditing procedures. For instance, it is useful in verifying receivables where other forms of evidence might not be as reliable.

Examples of Positive Confirmation Use

Consider a company with several accounts receivable from various customers. An auditor may send out positive confirmations to these customers requesting them to verify the outstanding amounts. Regardless of whether the customers agree with the amounts, they are required to respond. This helps in identifying any discrepancies and ensures the stated balances are accurate.

Historical Context

Various financial scandals and incidents in the past have highlighted the necessity for robust confirmation processes. Notable cases such as the Enron scandal underscored the critical role that proper auditing and verification processes play in maintaining financial integrity.

Applicability and Importance

In Different Sectors

Finance and Banking: To confirm loan balances, terms, and conditions.
Real Estate: To verify terms of leases, mortgage balances, and other significant agreements.
Insurance: To confirm policy details and claims.

Comparative Analysis

Positive vs. Negative Confirmations

Positive Confirmation: Higher reliability due to mandatory response.
Negative Confirmation: Lower reliability but more efficient in terms of cost and bulk handling.

Auditor: A professional who examines the accuracy and validity of financial records and statements.
Financial Statement: A formal record of the financial activities and position of a business, person, or other entity.
Receivables: Amounts that a company is owed by its customers for goods or services delivered on credit.

FAQs

Why are positive confirmations preferred in high-risk audits?

Positive confirmations are preferred in high-risk audits because they require a response, which provides more reliable audit evidence compared to negative confirmations or other testing methods.

Can positive confirmations identify fraud?

While they are primarily used to verify the accuracy of financial information, positive confirmations can help detect discrepancies that may indicate fraud.

References

International Auditing and Assurance Standards Board (IAASB), International Standard on Auditing (ISA) 505.
American Institute of Certified Public Accountants (AICPA), Generally Accepted Auditing Standards (GAAS).

Summary

Positive confirmation plays a critical role in the auditing process by ensuring the accuracy of financial transactions and balances through mandatory third-party responses. This method provides high assurance and is particularly crucial in areas where financial integrity and accuracy are paramount.