## SA 505: When Management Refuses External Confirmation

### What is External Confirmation?

External confirmation is direct written response to the auditor from a third party (confirming party) in paper or electronic form. It is one of the most reliable forms of audit evidence because it comes from an independent source.

### The Problem: Management Refuses to Allow Confirmation

Occasionally, management refuses to permit the auditor to send confirmation requests. This creates a significant audit challenge because the auditor cannot directly contact third parties.

### Required Steps When Refusal Occurs

Step 1 – Inquire and Evaluate Reasons

The auditor must ask management why they are refusing and then assess whether those reasons are valid and reasonable. A legitimate reason might be ongoing litigation with a party; an illegitimate reason (e.g., hiding fraud) raises serious red flags.

Step 2 – Evaluate Impact on Risk Assessment

The refusal itself is a piece of audit evidence. The auditor must re-evaluate:

The risk of material misstatement (especially fraud risk)
Whether the assessed risk changes
What additional procedures are now required

Step 3 – Perform Alternative Audit Procedures

The auditor must design alternative procedures to gather equivalent, relevant, and reliable evidence. Examples: subsequent receipts testing, examination of contracts, third-party invoices.

### If Refusal is Unreasonable or Alternatives Fail

When the auditor concludes the refusal is unreasonable, or cannot obtain sufficient evidence through alternatives, two escalation actions are mandatory:

1. Communicate with Those Charged with Governance (TCWG) – as per SA 260

2. Determine implications for the audit opinion – as per SA 705 (possible modification of opinion)

### Key Principle

Management's refusal does not eliminate the auditor's obligation to obtain sufficient appropriate evidence. It merely changes the pathway.

Worked example

### Example 1

Scenario: The auditor of a manufacturing company plans to confirm outstanding trade receivables with debtors. Management refuses, citing that several debtors are in price-renegotiation discussions and confirmation letters could harm those negotiations.

Step 1 – Inquire: The auditor asks management to explain the commercial sensitivity. Management provides emails showing active negotiations.

Step 2 – Evaluate: The auditor reassesses whether this reason is valid. Since the negotiations are documented and real, the reason has some validity. However, the auditor notes that management's refusal still increases fraud risk — the auditor cannot independently verify balances.

Step 3 – Alternatives: The auditor performs: (a) subsequent cash receipts testing — verifying that debtors actually paid post-year-end; (b) review of signed sales contracts and delivery notes to confirm existence of the receivable.

Outcome: If alternative procedures provide sufficient evidence, the auditor can continue without external confirmation. If the refusal remains unreasonable or alternatives are inadequate, the auditor communicates with TCWG and considers a modified opinion under SA 705.

⚠️ Common exam mistakes

Treating management's refusal as automatically unreasonable — the auditor must first inquire and assess the validity of the reasons before concluding unreasonableness.
Skipping alternative audit procedures and going straight to a modified opinion — SA 505 requires performing alternatives first.
Forgetting the dual escalation: both communicating with TCWG (SA 260) and determining opinion implications (SA 705) are required when refusal is unreasonable.
Confusing 'management refuses to send confirmation' with 'confirming party does not respond' — these are two different situations requiring different responses under SA 505.

Bare-Act text Management's Refusal to Allow the Auditor to Send a Confirmation Request · SA 505 – External Confirmations · click to expand

If management refuses to allow the auditor to send a confirmation request, the auditor shall: (i) Inquire as to management's reasons for the refusal, and seek audit evidence as to their validity and reasonableness; (ii) Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and (iii) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence. If the auditor concludes that management's refusal is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor shall communicate with those charged with governance in accordance with SA 260 and determine the implications for the audit and the auditor's opinion in accordance with SA 705.

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SA 505 – External Confirmation: Management Refusal

Worked example

⚠️ Common exam mistakes