Notes on SA505 External Confirmation Revision Session

Introduction

Welcome to the revision session of SA505 External Confirmation.
External Confirmation is an audit evidence received as a direct written response from a third party to the auditor.

External Confirmation: Audit evidence obtained directly from a third party without any intermediary involvement.
- Can be in paper or electronic form.

Decide What to Know: Determine what information is needed from the third party.
Select Appropriate Conforming Party: Choose the right party to obtain information from.
Design the Confirmation Request:
- Address to the appropriate manager (e.g., the manager of HDFC Bank).
- Include auditor's address for response.
Send the Request: Follow up if there is no response.

Layout and Presentation: Ensure clarity and professionalism.
Assertions Addressed: Identify key assertions that need confirmation.
Prior Experience: Consider previous experiences and the risk of material misstatement (ROMAM).
Authorization: Ensure management's authorization for confirmations.
Method of Communication: Determine how requests will be sent.
Ability of Conforming Party: Assess whether the third party can provide the required information.

Positive Confirmation Request (PCR):
- Requires a reply from the conforming party in all cases (agree/disagree/no information).
- Provides reliable audit evidence but may risk unverified responses.
Negative Confirmation Request (NCR):
- Requires a reply only if the conforming party disagrees with the information.
- Less persuasive evidence due to potential non-responses; does not confirm agreement or verification.
- Four conditions must be met for use:
  1. ROMAM is assessed as low.
  2. Low exception rate.
  3. Homogeneous balances.
  4. No indication that the conforming party will disregard the request.

Risks of material misstatement due to fraud should be evaluated.
If management refuses to send requests, evidence should be gathered to understand the reason.
Consider nature, timing, and extent of audit procedures based on findings.

If primary confirmation procedures are not possible or responses are unreliable, alternate procedures must be conducted, such as:
- Checking shipping documents and invoices for debtors.
- Reviewing subsequent cash receipts.
- Examining legal documents for disputes.

If material misstatements are suspected, report to TCWG (SA-260) and consider implications (SA-705).

Review of SA330 (deciding to send confirmations) and SA505 (procedures for sending confirmations).
Confirm balances with debtors, creditors, and other relevant parties.
Understand that external confirmations provide important audit evidence but require careful consideration of risks and reliability.

Emphasize the importance of careful planning and execution in the audit process.
Maintain a positive attitude and stay engaged in the learning process.