The new rules of Audit Confirmation Process

The Public Company Accounting Oversight Board (PCAOB) on July 13, 2010 approved the publication of a proposed auditing standard regarding Confirmation. In a statement issued with the proposed new standard, PCAOB Acting Chairman Daniel L. Goelzer said the proposal modernizes the current confirmation standard, AU Section 330, The Confirmation Process, and strengthens the confirmation requirements to better protect investors and other users of audited financial statements.

This proposed standard comprises of 36 paragraphs which provides guidance about the confirmation process in audits performed in accordance with generally accepted auditing standards.

It defines the confirmation process (see par. 04), discusses the relationship of confirmation procedures to the auditor’s assessment of audit risk (see par. 05 through 10), describes certain factors that affect the reliability of confirmations (see par. 16 through 27), provides guidance on performing alternative procedures when responses to confirmation requests are not received (see par. 31 and 32). It also provides guidance on evaluating the results of confirmation procedures as states in par. 33.

In par. 05 the standards states that in determining the audit procedures to be applied, including whether they should include confirmation procedure, the auditor uses the audit risk assessment.

In relation with the audit risk assessment (read about the concept of audit risk in here), par. 07 states that the greater the combined assessed level of inherent and control risk, the greater the assurance that the auditor needs from substantive tests related to the financial statement assertion. In this situation, the auditor might use confirmation procedures rather than or in conjunction with tests directed toward documents or parties within the entity.

While par. 06 states that confirmation is undertaken to obtain evidence from third parties about financial statement assertions made by management. In general, as states in Section 326, Evidential Matter, it is presumed that “when evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity.”

There are two types of confirmation requests : the positive and the negative form. If the auditor uses the positive form of confirmation, he or she should considering since there is a risk that recipients of a positive form of confirmation request with the information to be confirmed contained on it may sign and return the confirmation without verifying that the information is correct, blank forms may be used as one way to mitigate this risk.

When the auditor has not received replies to positive confirmation requests, he or she should apply alternative procedures to the non-responses to obtain evidence necessary to reduce audit risk to an acceptably low level. However, the omission of alternative procedures may be acceptable in several circumstances as stated in par. 31 to the standard.

The nature of alternative procedures varies according to the account and assertion in question. In the examination of account receivable, for example, the auditor may conduct the examination of subsequent cash receipts, shipping documents, or other client documentation to provide evidence for the existence assertion.

The complete proposed standard and another related materials are downloadable in here

Comments for the proposed auditing standard are due on September 13, 2010.