## SA-505: External Confirmations

External confirmation is audit evidence obtained as a direct written response from a third party (the confirming party), in paper or electronic form.

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### Types of Confirmation Requests

Feature	Negative Confirmation	Positive Confirmation
When TP must respond	In ALL cases (agree or disagree)	Only on exception
Persuasiveness	More reliable audit evidence	Less persuasive
Risk	TP may reply without checking	Lower risk of false response

Negative confirmation is appropriate only when ALL 5 conditions are met:

1. RMM is low

2. Auditor has S&A evidence on effectiveness of controls

3. Population consists of small, homogeneous transactions

4. Chances of exceptions are low

5. Auditor is not aware of circumstances causing the TP to disregard the request

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### Control Over Sending Confirmations

a. Determine what information to confirm/request

b. Select the appropriate third party

c. Design the confirmation request (properly addressed; contains required information)

d. Send and follow up with the confirming party

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### Factors When Designing the Confirmation Request

1. Assertions being addressed

2. Assessed RMM

3. Method of communication (paper/electronic)

4. Layout and presentation

5. Prior experience on the audit or similar engagement

6. Authorization of management

7. Ability of the intended confirming party

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### Determining Information to Be Confirmed

Account balances and terms of agreement/contract/transaction (including side-agreements)
Request is relevant and reliable only if the third party has sufficient knowledge
If a reply to a prior request was not received, send a follow-up

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### When Management Agrees to Confirmations

Auditor categorises responses as:

1. Response without exception

2. Response indicating an exception

3. Response deemed unreliable

4. Non-response

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### When Management Refuses to Send Confirmations

Auditor must:

1. Inquire reasons from management and assess reasonableness (legal dispute or ongoing negotiation = reasonable grounds)

2. Evaluate implications on RAP and NTE of further audit procedures

3. Perform alternative audit procedures to obtain relevant and reliable audit evidence

If refusal is unreasonable OR alternative procedures are insufficient:

Balance Type	Alternative Procedures
Account Receivable	Subsequent cash receipts; shipping documents
Account Payable	Subsequent cash disbursements; goods receipt notes

Auditor shall then:

Communicate with TCWG
Consider implications on audit report per SA-705

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### Exception

A response that indicates a difference between information in the entity's records and information provided by the confirming party.

Worked example

### Example 1

When to use Negative Confirmation: A company has 2,000 small, homogeneous trade receivable balances. Controls over the billing process have been tested and found effective. RMM is assessed as low. The auditor decides to use negative confirmation — requesting that debtors respond only if they disagree with the stated balance. This is appropriate because all five conditions are satisfied.

### Example 2

Alternative Procedure after Management Refusal: The auditor requests confirmations for debtors, but management refuses citing an ongoing legal dispute with one major customer. For that customer, the auditor performs alternative procedures: (a) reviews subsequent cash receipts in the bank statement after the balance sheet date, and (b) examines shipping documents for goods dispatched before year-end. This provides S&A evidence without requiring direct confirmation.

⚠️ Common exam mistakes

Confusing positive and negative confirmation: Positive confirmation requires response ONLY on exception (less persuasive); negative confirmation requires response in ALL cases (more persuasive).
Treating management's refusal as automatically acceptable — auditor must assess reasonableness and always attempt alternative audit procedures.
Forgetting that if alternative procedures still fail to provide sufficient evidence, the auditor must communicate with TCWG and modify the report per SA-705.
Omitting follow-up when no reply is received to an initial positive confirmation request.

Reference: SA-505 — Standards on Auditing — ICAI

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