When performing an audit, CPAs send confirmation letters to outside parties typically via the U.S. Postal Service in accordance with Interim Auditing Standard AU Section 330, The Confirmation Process. Confirmation responses may be used to verify account balances, as well as unusual contractual terms and transactions, but the use of confirmations sometimes extends beyond loans and receivables.
Creative use of confirmations
Confirmation letters also may be used to substantiate inventory, consigned merchandise, construction and production contracts, accounts payable, contingent liabilities, and complex or related-party transactions. For example, confirmation letters may be sent to a company’s lawyers to determine whether there’s any pending litigation that needs to be reported or disclosed in the company’s audited financial statements.
Sometimes confirmation responses signal exceptions, requiring the auditor to determine the causes and extrapolate the misstatements. Additional procedures may be warranted, especially if management or the CPA suspects fraud.
Not for everyone
Do not assume that all external assurance services include confirmation procedures, however. Reviews and compilations rarely include confirmations, and management may specifically request that auditors not confirm certain balances. For example, management may claim a dispute between the company and the intended recipient of a confirmation letter.
If an auditor accepts that a request not to seek external confirmation is valid, they might instead use alternative procedures, which generally hinge on less reliable internal documentation. If the auditor is satisfied with the alternative procedures, their report need not acknowledge the omission of confirmations.
Quid pro quo
Management sometimes argues that it is above-and-beyond the call of duty to ask their customers, suppliers, and other stakeholders to respond to confirmation letters. In addition, auditors are aware that some companies, such as certain large box retailers, are unlikely to take the time to confirm account balances. However, sending confirmations is a standard auditing procedure, and, someday, you might be on the receiving end of such as request.
When you receive confirmation letters, remember they can be an effective way to determine whether account balances and transactions are legitimate. Be a good corporate citizen and help your customers and suppliers — as well as their auditors.