# External Confirmations — Positive Confirmation Requests and Exception Handling

## Types of Confirmation Requests

### Positive Confirmation Request

A request that asks the confirming party to respond directly to the auditor — whether or not they agree with the information in the request.

A response is required in all cases (agreement and disagreement alike).
More reliable evidence because the confirming party must actively engage.
Typically used for: trade receivables, bank balances, legal claims.

### Negative Confirmation Request

A request that asks the confirming party to respond only if they disagree with the information.

Less reliable — silence is treated as agreement, but the party may not have received or reviewed the request.
Used when: risk of material misstatement is low, the population has many small balances, and a high response rate is expected.

---

## What is an Exception?

An exception is a confirmation response that shows a difference between:

The information requested to be confirmed (or in the entity's records), AND
The information provided by the confirming party.

---

## Auditor's Response to an Exception

1. Request reconciliation: Ask the company to investigate and explain the discrepancy.

2. Analyse the reason: Is it a timing difference (payment in transit, goods in transit)? Or an error in the company's records?

3. Perform further procedures: Per SA 330, determine whether additional audit evidence is needed based on the nature of the exception.

4. Evaluate in context: Consider whether, combined with other audit procedures, sufficient appropriate audit evidence has been obtained.

5. Project to the population: If the exception suggests a systemic error, assess its impact on the entire population (not just the one balance).

Worked example

### Example 1

Case (Q38 — Trade Receivable Confirmation with Exception): FD Limited has a trade receivable outstanding for more than 6 months amounting to ₹4,25,000. The auditor sent a confirmation letter requesting the party to respond directly — whether or not they agree. The party confirmed they owe ₹4,20,000 (not ₹4,25,000).

Type of Confirmation: Positive Confirmation Request

Reason: The auditor requested a response regardless of whether the party agreed or disagreed — the hallmark of positive confirmation.

Nature of Response: Exception

Reason: There is a ₹5,000 difference between FD Limited's records (₹4,25,000) and the confirming party's books (₹4,20,000).

Auditor's Action:

1. Ask FD Limited to formally investigate and reconcile the ₹5,000 difference.

2. Obtain a written reconciliation — likely explanations include: goods returned not yet recorded by FD, cash payment posted by the debtor but not yet received/posted by FD, or a credit note issued but not applied.

3. Examine supporting documents for the reconciling item (e.g., return note, bank statement, credit note).

4. Apply SA 330 — determine if further substantive procedures are necessary.

5. If the exception pattern is systemic, project the error rate across the entire receivables population and assess impact on the financial statements.

⚠️ Common exam mistakes

Dismissing a small-value exception (e.g., ₹5,000) as immaterial without investigation — every exception must be explained through reconciliation; materiality assessment comes after understanding the reason.
Confusing positive and negative confirmations — positive requires a response in all cases; negative only requires a response on disagreement.
Assuming an exception always means the company's records are wrong — it may be a legitimate timing difference (payment in transit) that needs documentation, not correction.
Failing to project exceptions to the overall population — a single exception may indicate a pattern affecting many balances, which could be material in aggregate even if the individual instance is not.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →