The Power of External Confirmations in Auditing
External confirmations are a cornerstone of the audit process, enabling auditors to independently verify key financial statement components, such as cash, receivables, payables, and legal contingencies, without relying solely on internal records.
Why Confirmations Matter
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Independent Verification: Confirmations offer an unbiased perspective, ensuring your financial data aligns with external records.
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Risk Mitigation: By validating balances and terms, confirmations reduce the likelihood of errors or fraud.
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Regulatory Compliance: Confirmations align with auditing standards, ensuring your financial statements meet rigorous requirements.
Understanding the Confirmation Process
The types of confirmations your auditor will use will vary depending on your situation and the nature of your organization’s operations. Confirmations may come in the following three general formats:
Types of Confirmations
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Positive Confirmations: Third parties must respond, confirming or disputing the provided information.
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Negative Confirmations: Third parties respond only if they disagree with the information.
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Blank Confirmations: Third parties provide specific details, such as balances owed, without prefilled data.
Confirmed balances may need to be rolled forward (or backward) to reconcile with amounts reported on the balance sheet date.
From Paper to Digital: A Modern Approach
There was a time when auditors used to mail confirmations and wait for the responses to roll in. Today, however, your CPA firm will likely utilize secure, third-party electronic platforms to expedite the confirmation process, enhance security, and improve audit efficiency.
Evolving Standards: The Future of External Confirmations
In 2023, the Public Company Accounting Oversight Board (PCAOB) introduced Auditing Standard (AS) No. 2310, which helps strengthen and modernize the auditor’s confirmation process. The guidance is effective for public company audits for fiscal years ending on or after June 15, 2025. Key changes include:
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Explicitly includes electronic confirmations and third-party intermediaries.
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Reinforces requirements to confirm accounts receivable and introduces mandatory confirmation of cash and cash equivalents.
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Phases out negative confirmations as valid audit evidence.
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Emphasizes auditor oversight in selecting items, sending, and receiving confirmations.
When confirmation procedures aren’t feasible, the auditor must perform alternative procedures to obtain relevant and reliable evidence for the information in question. For example, auditors can get direct, read-only access to transactions or balances.
Technology has changed the confirmation process over the last 20 years. And more changes may be on the horizon. While PCAOB standards apply to public companies, in February 2025, the Auditing Standard Board (ASB) proposed changes to its confirmation standard based on the public company guidance, with potential adoption in 2027. Additionally, many auditors are exploring ways artificial intelligence (AI) might help them automate confirmation tracking and identify confirmation risk patterns.
Partner with GBQ
External confirmations may seem like just an audit formality, but they’re evolving into faster, smarter, and more secure tools for validating your financials. Contact GBQ to learn how external confirmations will enhance your next audit and how our expertise in updated standards and AI-driven processes can benefit your organization.
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