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SA 505 — External Confirmations

Imagine you're auditing Rajesh & Co. Pvt. Ltd. and their balance sheet shows ₹85 lakhs in debtors. You could just trust the company's own ledger — or you could go directly to the debtors and ask, "Hey, do you actually owe Rajesh & Co. this amount?" That second approach is exactly what SA 505 External Confirmations is about. It's one of the most powerful audit tools because the evidence comes from an independent third party, not from the client whose books you're checking.

External confirmation means obtaining and evaluating audit evidence by directly contacting a third party (a bank, debtor, creditor, lawyer, etc.) to confirm information in the financial statements. There are two types: positive confirmation requests the party to respond whether they agree or disagree with the stated amount — this gives more reliable evidence. Negative confirmation only asks them to respond if they disagree — used when risk is low and many small balances exist. The auditor sends the requests, controls the process, and receives responses directly (not via the client). If management tries to intercept or control the confirmation process, your independence is compromised and the evidence loses its value.

What happens when a debtor doesn't reply? A non-response to a positive confirmation request is NOT evidence that the balance is correct — don't make that mistake. You must perform alternative procedures — like checking subsequent cash receipts, dispatch records, or invoices. If management refuses to let you send confirmations at all, treat it as a scope limitation, assess why (legitimate business reason or something to hide?), and consider the impact on your audit report. SA 505 also deals with exceptions — if a debtor confirms ₹12 lakhs but the ledger says ₹15 lakhs, investigate that ₹3 lakh gap thoroughly; it could be timing differences, disputes, or outright fraud. The reliability of confirmations depends heavily on the auditor's control over the process — always use your own envelopes, your own email, and ensure replies come back directly to you. This is asked frequently as a 4-mark or 8-mark question in Paper 5.

📊 Worked example

Example 1 — Positive Confirmation with a Non-Response

You are auditing Meera Textiles Ltd. The debtors ledger shows ₹1,20,00,000 (₹1.2 crores) outstanding from 45 parties. You send positive confirmation requests to all 45.

  • 40 parties respond and confirm their balances ✓
  • 3 parties respond with exceptions (differences) — investigate each ✓
  • 2 parties do not respond at all

Step 1: Non-response ≠ confirmation. Do NOT treat silence as agreement.

Step 2: Send a second request to the 2 non-responding parties.

Step 3: If still no response, perform alternative procedures:

  • Check if ₹8,40,000 outstanding from Party A was received after year-end → Bank statement shows receipt of ₹8,40,000 on 5 April → Balance confirmed via subsequent receipt ✓
  • For Party B (₹6,20,000): Check dispatch records, invoices, correspondence → Evidence supports balance ✓

Conclusion: All ₹1,20,00,000 is sufficiently evidenced. No qualification needed.

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Example 2 — Management Refuses to Send Confirmations

While auditing Arora Exports Pvt. Ltd., management says: "Our debtors are sensitive clients — please don't contact them directly." Debtors total ₹45,00,000.

Step 1: Assess whether the refusal is reasonable. Management cites ongoing negotiations — you note this but remain alert.

Step 2: Since you cannot send confirmations, perform alternative procedures:

  • Subsequent receipts verified: ₹38,00,000 received post-year-end ✓
  • Balance ₹7,00,000 — invoices, delivery challans reviewed ✓

Step 3: If alternative procedures are satisfactory, no modification needed.

Step 4: BUT — document that management refused, and evaluate if refusal itself signals higher fraud risk.

Key takeaway: If alternative procedures cannot cover the gap and risk is high, this becomes a scope limitation → qualified or disclaimer of opinion.

⚠️ Common exam mistakes

  • Students treat non-response as confirmation — a debtor who doesn't reply has NOT confirmed anything. A non-response to a positive confirmation request always requires alternative procedures, never assume agreement.
  • Confusing who controls the process — many students think the client can send or collect confirmations on your behalf. Wrong. The auditor must control the entire process — preparing, sending, and receiving — to maintain independence and reliability of evidence.
  • Mixing up positive and negative confirmations — negative confirmations are NOT weaker by default; they are appropriate in specific conditions (low risk, high volume, small balances, reliable controls). Don't say "negative is always less reliable" without context.
  • Forgetting to investigate exceptions — if a confirmed amount differs from the ledger, students often ignore it or say "timing difference" without investigation. Every exception must be followed up; it could indicate fraud, disputes, or errors.
  • Missing the scope limitation angle — when management refuses to allow confirmations and alternative procedures are insufficient, students often skip the audit report implication. Always connect management refusal → scope limitation → possible qualification or disclaimer.
📖 Reference: SA 505 — Institute of Chartered Accountants of India
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