A crucial last step in the audit process is completing a confirmation letter. CPAs send confirmation letters to outside parties to verify account balances, as well as unusual contractual terms and transactions.
Who Do Auditors Send Confirmations To?
As mentioned, auditors send confirmation letters to third-parties. This could be a bank, lawyer or supplier. For example, a letter may be sent to a company’s lawyers to determine whether there’s any pending litigation that needs to be reported or disclosed in the company’s audited financial statements.
Sometimes confirmation responses signal exceptions, requiring the auditor to determine the causes and extrapolate the misstatements. Additional procedures may be warranted, especially if management or the CPA suspects fraud.
In the event that your business receives a confirmation letter, a response isn’t required, however confirmation will help your customers and suppliers — as well as their auditors.
Confirmation Letter Exceptions
Confirmation responses may be used to verify account balances, as well as unusual contractual terms and transactions. But the use of confirmations sometimes extends beyond loans and receivables.
Creative Use of Confirmations
Don’t assume that all external assurance services include confirmation procedures, however. Reviews and compilations rarely include confirmations. Management may specifically request that auditors not confirm certain balances. For example, management may claim a dispute between the company and the intended recipient of a confirmation letter.
If an auditor accepts that a request not to seek external confirmation is valid, he or she might instead use alternative procedures — which generally hinge on less reliable internal documentation. If the auditor is satisfied with the alternative procedures, his or her report needn’t acknowledge the omission of confirmations.
Management sometimes argues that it’s above-and-beyond the call of duty to ask their customers, suppliers and other stakeholders to respond to confirmation letters. And, auditors are aware that some companies, such as certain large box retailers, are unlikely to take the time to confirm account balances. However, sending confirmations is a standard auditing procedure — and, someday, you might be on the receiving end of such as request.
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