Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
External confirmations are often used <strong>to</strong> provide audit evidence about completeness of a liability and
existence of an asset. External confirmation can also provides evidence on whether the amount has been
accurately recorded in the accounting records (accuracy) and in the appropriate period (cu<strong>to</strong>ff). Confirmations
are less relevant in addressing valuation issues such as the recoverability of accounts receivable or the
obsolescence of inven<strong>to</strong>ry being held.
Typical situations where external confirmation procedures provide relevant audit evidence include:
• Bank balances and other information relevant <strong>to</strong> banking relationships;
• Accounts receivable balances and terms;
• Inven<strong>to</strong>ries held by third parties at bonded warehouses for processing or on consignment;
• Property title deeds held by lawyers or financiers for safe cus<strong>to</strong>dy or as security;
• Investments held for safekeeping by third parties, or purchased from s<strong>to</strong>ckbrokers but not delivered at
the balance-sheet date;
• Amounts due <strong>to</strong> lenders, including relevant terms of repayment and restrictive covenants; and
• Accounts payable balances and terms.
Matters the audi<strong>to</strong>r would consider are set out below.
Exhibit 10.3-1
Address
Dual Purpose Tests
Confirming Party’s
Knowledge of the
Subject Matter
Ability/Willingness
of Confirming
Party <strong>to</strong> Respond
Objectivity of the
Confirming Party
Description
Is there an opportunity <strong>to</strong> obtain audit evidence about other important matters at
the same time (such as terms of a contract, etc.)?
Responses will be more reliable if provided by a person knowledgeable in the subject
matter.
Consider the reliability of the evidence obtained if there is possibility of the
confirming party:
• Not accepting responsibility;
• Viewing a response as <strong>to</strong>o costly or time-consuming;
• Having concerns about potential legal liability;
• Accounting for transactions in different currencies; or
• Not treating the confirmation requests as significant.
Consider the reliability of the evidence obtained if the confirming party is a relatedparty.
In such situations, consider:
• Confirming additional details about the subject matter, such as terms of sales
agreements, including dates, any rights of return, and delivery terms; and
• Supplementing the confirmation with inquiries of non-financial personnel regarding
the subject matter, such as changes in sales agreements and delivery terms.
Audit evidence is generally considered more reliable when it is obtained from independent sources outside the
entity. For this reason, written responses <strong>to</strong> confirmation requests received directly from unrelated third parties
may assist in reducing the risk of material misstatement for the related assertions <strong>to</strong> an acceptably low level.