## External Confirmation (SA 505)

### Key Definitions

Term	Meaning
External Confirmation	Direct written response from a third party (confirming party) to the auditor – in paper, electronic, or other medium
Positive Confirmation	Confirming party responds whether they agree OR disagree with the information
Negative Confirmation	Confirming party responds ONLY IF they disagree

> Positive confirmations provide more persuasive evidence because a response is always required.

### Common Areas Where External Confirmation is Used

Bank balances
Accounts receivable / payable balances
Inventories held by third parties
Property title deeds held by third parties
Investments purchased but delivery not yet taken
Loans from lenders
Long outstanding share application money

### Auditor's Control Over the Process

The auditor must maintain control over all steps:

1. Determining what information to confirm

2. Selecting the appropriate confirming party

3. Designing the confirmation requests

4. Sending requests directly to the confirming party

### Factors in Designing Confirmation Requests

1. Assertions being addressed | 2. ROMM | 3. Layout and presentation

4. Prior experience | 5. Method of communication | 6. Management's authorization

7. Ability of confirming party to provide the information

### Management Refuses to Allow Confirmation

Auditor must:

1. Inquire management's reasons → assess validity and reasonableness

2. Evaluate implications of refusal on ROMM

3. Perform alternative audit procedures

4. If refusal is unreasonable OR alternative procedures insufficient:

Communicate with TCWG
Express Modified Opinion

### When Negative Confirmation Requests (NCR) Can Be Sole Procedure

NCR provides less persuasive evidence. It can be the sole procedure ONLY when ALL 4 conditions are met:

1. Auditor assessed RMM as low

2. Population consists of large number of small, homogeneous balances/transactions

3. Very low exception rate is expected

4. Auditor is not aware of circumstances that would cause recipients to disregard the request

### Analyzing Confirmation Results

Situation	Required Action
Response received but appears unreliable	Consider effect on other procedures; may indicate fraud risk factors
No response to positive confirmation	Perform alternative audit procedures
No confirmation obtained AND alternative procedures insufficient	Express Modified Opinion

Worked example

### Example 1

Positive confirmation: The auditor sends a request to a debtor asking them to confirm or deny that ₹2,00,000 is outstanding as of 31st March 2025. The debtor's written reply stating 'We confirm the balance of ₹2,00,000 is correct' constitutes highly reliable external audit evidence (external, direct, documentary).

### Example 2

Management refusal: Management refuses to allow the auditor to send confirmation requests to debtors, claiming customers will be disturbed. The auditor: (a) inquires into reasons – assesses as unreasonable since no valid business basis, (b) performs alternative procedures – reviews subsequent cash receipts – but they are insufficient to confirm the year-end balance, (c) communicates with the audit committee, (d) issues a qualified opinion.

### Example 3

Using NCR appropriately: A bank has 50,000 small savings accounts, each below ₹10,000, with historically zero dispute rate, and no known fraud indicators. Here all 4 NCR conditions are met. The auditor may use negative confirmation requests as the sole procedure.

⚠️ Common exam mistakes

Using negative confirmations as the sole procedure without verifying ALL 4 conditions simultaneously – even one unmet condition makes NCR alone insufficient
Treating non-response to a positive confirmation request as confirmation of the balance – non-response mandates alternative audit procedures
Confusing positive vs. negative: positive requires a response either way; negative requires a response ONLY when the confirming party disagrees
Allowing management to send or control confirmation requests – the auditor must maintain control throughout (preparation, sending, receiving replies)
Not escalating to a modified opinion when management's refusal is unreasonable and alternative procedures are insufficient

Bare-Act text Definition – External Confirmation · SA 505 – External Confirmation (ICAI) · click to expand

External confirmation means audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.

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 →

Types of Confirmations, Process Control, Management Refusal, and Handling Non-Responses

Worked example

⚠️ Common exam mistakes