Electronic financial tools — such as online banking, mobile payment apps, and paperless invoicing — are increasingly popular in today’s business world. However, existing auditing standards still require auditors to send out paper confirmation letters through the U.S. Postal Service. To modernize the confirmation process, the Public Company Accounting Oversight Board (PCAOB) may revive a 2010 proposal to expand the definition of ‘confirmation responses.’ Here is how confirmation procedures will likely change if the proposal is reissued and approved.
Auditors send third-party confirmation letters to customers to verify accounts receivable and to financial institutions to confirm notes payable. They also may choose to substantiate notes receivable, inventory, consigned merchandise, long-term contracts, accounts payable, contingent liabilities, and related-party and unusual transactions.
When confirmation responses signal exceptions, auditors follow three steps: 1) Determine the cause, 2) extrapolate the misstatement to see whether additional testing is necessary, and 3) consider fraud.
Auditors must maintain control over confirmation procedures to minimize the possibility that the results will be biased because of alteration of the confirmation requests or responses. Therefore, they typically send paper requests through standard U.S. Postal Service mail in accordance with Interim Auditing Standard AU Section 330, The Confirmation Process. This can be time-consuming, especially if recipients fail to respond.
Need for change
AU Sec. 330 went into effect in 1992. In addition to mailed confirmation responses, it refers to confirmation responses received orally or via facsimile — but not to electronic communications or online records.
In 2010, the PCAOB issued a proposal that, among other changes, defined a confirmation response to include electronic or other media. This would make the confirmation process more efficient — although auditors would need to take into account the risks associated with electronic confirmation responses.
Work in progress
After tabling the proposal for five years to work on other projects, the PCAOB is planning to revive it. If electronic responses are accepted, the confirmation process could soon be more efficient.