3 Positive and Negative confirmation requests
3.1 Positive confirmation request
A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
In simple words under positive confirmation requests third party is bound to respond notwithstanding if they agree to the information sent or not. This confirmation method is suitable when auditor demands additional information or the written confirmation from third party is necessary.
3.2 Negative confirmation request
A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.
In simple words third party is required to respond only if they agree to the information sent. If they don’t respond in stated time then it will be considered that third party agrees to the information sent by the auditor.
- Auditor use negative confirmation request when:
- Assessed level of risk of material misstatement is low
- Auditor expects information with the auditor and with the client are same
- Auditor believes that third party will not disregard the request in case of disagreement. This is often the case as third parties might be reluctant to respond if is going in their favour and more likely respond only when things are not in their favour. For example customer of the client is less likely to respond to negative confirmation if receivables are understated but more likely respond if receivables are overstated.
4 Management’s refusal to permit external confirmations
If management refuses to permit auditor to seek confirmation from third parties then auditor shall:
- Ask management to know the reasons and determine if they are valid
- Assess how management’s refusal will affect the work of auditor in obtaining sufficient appropriate audit evidence
- Apply alternative procedures to obtain audit evidence
Management’s refusal is not always unreasonable. For example if client is in dispute with the party from whom auditor intended a confirmation, then such request may hamper the dispute resolution process.
If auditor concludes that the reasons of refusal are unreasonable then auditor shall communicate the matter to those charged with governance and determine whether modification according the provisions of ISA 705.