Briefly explain how an audit firm may use third party confirmations to provide evidence in relation to six difference balance sheet items.

Auditing and Assurance Revision Questions and Answers

One of the principal methods of obtaining corroborative evidence available to auditors is by inquiry. Inquiry involves seeking information from knowledgeable persons inside or outside the entity. Confirmation is the name given to a specific form of inquiry that is particularly widely used. It involves obtaining written confirmation from a third party, typically, although not exclusively, in relation to an account balance in which the third party has an interest. Confirmations can therefore be used for the following balances.

 Bank balance- the auditor can request the client‘s bankers to confirm the balance they are holding on behalf of the client as at the end of the year. This will confirm existence, completeness and accuracy;
 Debtors- by carrying out debtors‘ circularization. The replies will provide corroborative evidence to confirm existence of the debtor;
 Creditors– by carrying out creditors‘ circularization. The replies will provide corroborative evidence, completeness and accuracy of the creditor‘s balance;
 Investments (such as government securities, shares)- requesting a confirmation from the issuer of the instrument will provide evidence to confirm existence and accuracy of the investment balances. E.g. requesting the Central bank to confirm the amount of investments in government securities held by a client;
 Loans – requesting the provider of the loan to confirm how much they have granted the company and the terms of such facilities;
 Contingent liabilities – if the contingency relates to litigation against the company, the auditor could seek confirmation from the lawyers on the facts of the case and the likely outcome. This will assist in evaluating whether the contingency has been properly treated in the financial statements.

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