[Opinion] External Confirmations Along with SA 505 Checklist

Srinivasan Anand G. – [2024] 160 taxmann.com 688 (Article)

1. About

According to SA 505, “External Confirmation” is a direct written response obtained by the auditor from a third party (the confirming party) in paper form or by electronic or other medium. In PCAOB’s AS 2310 The Auditor’s Use of Confirmation (effective for FYE on or after 6/15/2025) (hereinafter referred to as “AS 2310 (New)”), the equivalent terminology for “external confirmation” is “confirmation response”.

The rationale behind the auditor’s obtaining of “confirmation response” or “external confirmation” directly from a third party is that it ticks all the boxes of reliability of audit evidence enunciated in SA 500 as under:

(a) It is obtained from independent sources outside the entity.

(b) It is obtained directly by the auditor

(c) It is in in documentary form, whether paper, electronic, or other medium

On the importance of external confirmations, the NFRA observed as under:

“29. …… Confirmation “is undertaken to obtain evidence from third parties about financial statement assertions made by management” consistent with the presumption that when evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity. ……”

SA 505 deals with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the requirements of SA 330 and SA 500. It does not address inquiries regarding litigation and claims. SA 501 deals with obtaining sufficient appropriate audit evidence from such inquiries. The auditor’s objective when using external confirmation procedures is to design and perform such procedures to obtain relevant and reliable audit evidence.

2. External Confirmation/Confirmation Response

From the definitions given in SA 505 and AS 2310(new), “External Confirmation” or “Confirmation Response” has the following ingredients:

• Written: It is a written communication received by the auditor from a confirming party.
• Form: It may be in paper or electronic form.
• Direct: It is received directly by the auditor.
• Response: It is received in response to a confirmation request from the auditor.

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