- 10 Marks
Question
ISA: 505 External Confirmations states that ‘the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level’. An Auditor may obtain external confirmations from third parties to corroborate the audit evidence already available with the auditor. The Auditor shall determine whether positive or negative request is appropriate given the condition.
Responses or events of non-responses are required to be evaluated. Responses may be unreliable if they are served indirectly to the auditor, not served by the intended person, or transmission is compromised, and the auditor may have to perform additional procedures to resolve doubts and suspicion. In events of non-responses or management refusal to permit the auditor to seek confirmations, the auditor shall assess if modification in the auditor’s report is necessary.
Required:
Explain FOUR (4) examples of external confirmations and for each one identify:
i) An audit assertion that the external confirmation supports; and
ii) An audit assertion that the external confirmation does NOT support.
(10 marks)
Answer
Examples of External Confirmations and Related Audit Assertions:
- Debtor’s Confirmation Letter
- Supports Assertion: Existence – The letter provides evidence of the existence of the debtor when a reply is returned directly to the auditor.
- Does NOT Support Assertion: Completeness – The debtor may not query balances that are understated, so the letter does not verify the completeness of the debtor balance.
- Solicitor’s Letter
- Supports Assertion: Existence – The solicitor confirms the existence of claims at the period end, providing evidence of the existence assertion.
- Does NOT Support Assertion: Completeness – Solicitors generally comment only on the claims they are asked about, so they may not provide a complete list of all claims.
- Bank Report Letter
- Supports Assertion: Existence – The letter provides good evidence on the existence of the company’s bank accounts.
- Does NOT Support Assertion: Accuracy – Banks may include disclaimers like “errors and omissions excepted,” which limit the letter’s accuracy as a complete verification.
- Certificate on Stock Held by Third Parties
- Supports Assertion: Existence – The certificate confirms that the stock physically exists at a third-party location.
- Does NOT Support Assertion: Valuation – Confirming the stock’s existence does not necessarily provide evidence on its condition or valuation.
(Total: 10 marks)
- Tags: Assertions, Audit evidence, External Confirmations, ISA 505, Third Party Confirmations
- Level: Level 2
- Topic: Audit and Assurance Evidence
- Series: NOV 2019
- Uploader: Dotse