Audit Confirmations: Bank, Receivables and Payables

An external confirmation is a written answer that comes straight to the auditor from a third party: a bank, a customer, a supplier, a lender. Because it comes from outside the client and reaches the auditor directly, it is some of the strongest evidence in an audit.

The standards are AU-C 505 (private companies), ISA 505 and CAS 505, and AS 2310 for public companies.

What gets confirmed

Area	Typical confirmation
Cash	Balances, loans and other arrangements with each bank
Accounts receivable	Customer balances or specific invoices
Accounts payable	Supplier balances, especially small and zero balances, for completeness
Debt	Balance, rate, terms and covenants with lenders
Legal	Litigation and claims, through the lawyer's letter
Inventory held by others	Goods at a third-party warehouse

For receivables, AU-C 330 requires confirmation unless the balance is immaterial, confirmations would not work (for example, customers who never reply), or the risk is low and other procedures cover it. If you skip it, document why.

Positive or negative requests

• Positive: the third party is asked to reply in every case, either confirming the balance or giving the right one. Use these where risk is meaningful.
• Negative: the third party replies only if they disagree. Silence is weak evidence, so negative requests are only appropriate when risk is low, there are many small balances, and you expect few exceptions.

Keep control of the process

The evidence is only as good as the route it takes.

1. The auditor sends the request, not the client.
2. Check the addresses and contacts yourself, against independent sources, not just the client's list.
3. Replies come back to the auditor, directly. An email forwarded by the client is not a confirmation.
4. Electronic platforms are fine if you are satisfied the process and the respondent are genuine.

Non-responses and alternative procedures

When a positive request gets no answer after a follow-up, do alternative procedures for that balance:

• Receivables: check cash received after year end against the specific invoices in the balance, and inspect the invoices, shipping documents and contracts behind them.
• Payables: inspect vendor statements, invoices and payments made after year end. See the accounts payable audit.

Exceptions

An exception is a reply that does not agree with the client's records. Investigate every one. Many are timing differences (a payment in transit, an invoice received after year end), but each needs evidence. Exceptions caused by errors may point to a wider problem in the account.

If management refuses to let you send a confirmation, ask why and look for evidence that supports the reason. An unreasonable refusal is a fraud risk factor and may need to go to those charged with governance.

Where Warp Accounting fits

Warp Accounting does not send or receive confirmations. Where alternative procedures mean inspecting the invoices and payments behind a balance, it matches those documents to the ledger entries, checks amounts and dates, and links each conclusion to the source page. See test of details, and our guides to vouching vs tracing and audit evidence.