Audit Procedures for External Confirmations Under SA 505

External confirmations are considered among the most reliable forms of audit evidence because they are obtained directly from an independent third party. However, auditors often face practical difficulties when either management refuses to permit confirmation requests or third parties fail to respond to them.

Although both situations affect the auditor’s ability to obtain external evidence, SA 505 – External Confirmations treats them differently. The auditor’s response depends on whether the issue arises from management’s refusal or from the confirming party’s non-response.

1. Why External Confirmations Matter

External confirmations help the auditor obtain evidence directly from parties outside the entity. They are commonly used for confirming:

• Trade receivables balances;
• Bank balances;
• Loans and borrowings;
• Payables;
• Inventory held by third parties;
• Terms of agreements; and
• Other account balances or transactions.

Since the evidence comes from an independent external source, it is generally more persuasive than internally generated records or management representations.

2. Scenario 1 – Management Refuses to Allow Confirmation Requests

In some cases, management may refuse to permit the auditor to send confirmation requests. For example, management may argue that sending balance confirmations to customers could affect business relationships or create confusion.

However, under SA 505, management cannot refuse confirmation requests merely on commercial or relationship grounds unless there is a valid reason.

3. Auditor’s Responsibility Where Management Refuses Confirmation

Where management refuses to allow the auditor to send confirmation requests, the auditor is required to:

• Inquire into management’s reasons for refusal;
• Evaluate whether the refusal is reasonable;
• Consider the implications for assessed risks, including fraud risk;
• Perform alternative audit procedures to obtain relevant and reliable audit evidence; and
• Evaluate whether sufficient appropriate audit evidence has been obtained.

If the auditor concludes that management’s refusal is unreasonable, it may indicate a restriction on the scope of the audit.

4. Can Internal Records Replace External Confirmations?

Internally generated records and management representations cannot automatically substitute for external confirmations.

While the auditor may examine invoices, ledgers, subsequent receipts, contracts, delivery records and other internal documents, such evidence may not be as reliable as evidence obtained directly from an independent third party.

Management representation may support other audit evidence, but it cannot by itself provide sufficient appropriate audit evidence where external confirmation is necessary.

5. Scenario 2 – No Response Received to Positive Confirmation Requests

A different situation arises when the auditor sends positive confirmation requests, but the confirming party does not respond despite follow-ups.

In such cases, silence cannot be treated as confirmation.

A non-response to a positive confirmation request does not provide audit evidence about the account balance or transaction.

6. Auditor’s Responsibility in Case of Non-Response

Where no response is received to a positive confirmation request, SA 505 requires the auditor to perform alternative audit procedures.

These procedures may include checking:

• Subsequent cash receipts;
• Sales invoices;
• Dispatch or delivery documents;
• Customer correspondence;
• Ledger reconciliations;
• Agreements or contracts;
• Subsequent settlement records; and
• Other relevant supporting documents.

The purpose is to obtain sufficient appropriate audit evidence regarding the existence, accuracy and recoverability of the balance.

7. Difference Between Management Refusal and Non-Response

The key difference lies in the cause of the issue.

Where management refuses confirmation, the auditor must evaluate whether management is restricting the audit procedure. This may raise concerns about management integrity or the risk of fraud.

Where confirmation requests are sent but no response is received, the issue is not management-imposed. The auditor must perform alternative procedures to obtain evidence.

8. When Alternative Procedures May Be Insufficient

Alternative procedures may not always provide sufficient appropriate audit evidence.

For example, if there are no subsequent receipts, poor documentation, disputed balances or weak internal records, the auditor may not be able to obtain reliable evidence through alternative procedures.

In such cases, the auditor must consider whether a limitation on audit scope exists.

9. Implication Under SA 705

If the auditor is unable to obtain sufficient appropriate audit evidence, the matter may require consideration under SA 705 – Modifications to the Opinion in the Independent Auditor’s Report.

Depending on the materiality and pervasiveness of the matter, the auditor may need to issue:

• A qualified opinion; or
• A disclaimer of opinion.

This would depend on the extent to which the inability to obtain evidence affects the financial statements.

10. Key Takeaway

Management’s refusal to allow confirmation requests and non-response to positive confirmation requests are not the same under SA 505. If management refuses confirmation, the auditor must assess the reasonableness of the refusal and consider whether it amounts to a scope limitation. If no response is received, the auditor must perform alternative audit procedures. In both cases, if sufficient appropriate audit evidence cannot be obtained, the auditor must consider the impact on the audit opinion in accordance with SA 705.

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