ISA 505 (REVISED AND REDRAFTED) EXTERNAL CONFIRMATIONS
External confirmations are frequently used by the auditor to confirm that balances are correctly stated in the financial statements. For example, the auditor could request external confirmation from an entity’s bankers to confirm the balances on the respective bank accounts agree with the reconciliations performed by the entity at the reporting date. External bank confirmation can also confirm the nature of any security which is required to be disclosed within the financial statements together with any related party issues that require disclosure such as directors’ guarantees. Another common external confirmation is that of customer (receivable) circularisation to confirm the balance outstanding at the reporting date. Such external confirmations are not absolute and other confirmations may be necessary depending on the risk assessment and the nature and complexity of the client being subject to audit.
When selecting the appropriate confirmation, the auditor will take into consideration various factors such as the assertion being addressed, the likelihood of the response rate, whether management will allow such external confirmation to be made and past experience of the audit.
A common audit procedure used by auditors is the circularisation of receivables. In this procedure, certain balances are selected using sampling methods and a letter is sent to the receivable, on the entity’s notepaper by the audit ...