July 23, 2024

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External Confirmation in Audits: Importance & Process

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External Confirmation in Audits: Importance & Process

External Confirmation all through an audit suggests audit proof attained as a immediate response to auditor from third get together.
SA 505 bargains with external confirmation, it indicates that the dependability of audit proof is motivated by its source and by its character, and is dependent on the unique instances less than which it is attained.
Why there is a need of External Affirmation?

Exterior evidence is far more dependable than the interior evidences
Evidences attained instantly by auditor are much more responsible than attained indirectly
Documentary Evidence, whether or not paper, electronic or other medium are additional responsible than the Oral evidences

When External Affirmation is demanded in the course of an audit?

Account Receivable – Auditors generally confirms the existence and validity of receivable equilibrium by specifically getting in contact with clients for the balance owed to them.
Account Payable –  Auditor may perhaps verify the accuracy and validity of amount of money owed by entity to its suppliers or sellers.
Bank Stability and Transactions – Auditor can ensure lender harmony and transactions right with the economic establishment to confirm dollars equilibrium, loans, overdraft, and other economical transactions.
Investments – External confirmation is expected to confirm the possession and valuation of financial investment held by the entity.
Financial loans and Borrowings –  Affirmation may perhaps be taken from loan providers or money establishment to confirm the existence, phrases, and equilibrium of any financial loans and borrowing noted by entity.
Contractual Agreements – Auditors may confirm the conditions, ailments, and existence of contracts these kinds of as sale agreements, lease, or obtain contracts.
Litigation and promises – Exterior Affirmation may perhaps be taken to confirm existence and standing of litigation or clams.
There are other folks functions or transactions in which exterior affirmation may possibly be essential this sort of as Similar Social gathering Transaction or Subsequent functions.

Important Thing to consider when trying to get Exterior Affirmation:
1. Materiality – Auditors prioritize items that are product to the financial statements.
2. Chance Evaluation – Affirmation Procedure are based mostly on the assessed hazard of material misstatement.
3. Dependability of Evidence – Auditors shall assess the dependability of affirmation response acquired irrespective of whether they offer ample or appropriate audit proof.
Exterior Confirmation Course of action :

Recognize the Information which is to be attained
Find the 3rd get together to whom inquiry will be designed
Design and style the Affirmation (Beneficial/ Adverse)
Optimistic confirmation request – A request where auditor needs response in each and every case irrespective of whether 3rd party agrees or not Negative Confirmation request – A request where auditor requirements response only when third social gathering disagrees.

                                                                                 DRAFT OF A Affirmation Ask for
Suppose you are an intern at a CA firm ABC LLP, on a audit engagement of a firm, SH LTD. You have been questioned by your senior to despatched a confirmation ask for to 1 of its buyer, GMC LTD concerning an quantity of ₹58000 receivable from them.
May 20, 2024
GMC LTD
Expensive ………….
This request is getting sent to you to help our impartial auditors, ABC LLP, to confirm the correctness of our records. It is not a request for payment.
Our documents confirmed an amount of ₹58000 receivable from you.
Make sure you verify whether or not this agrees with your data on that date by signing and returning this directly to our auditors, ABC LLP. An addressed envelope is enclosed for this function.
If you find any big difference, remember to report specifics specifically to our auditors in the house provided underneath.
Regards,
………….
Conclusion : External affirmation performs a vital job in the audit approach by furnishing auditors with the independent verification of vital money data from exterior events. It improves the reliability and trustworthiness of audit evidence, thereby contributing to the all round performance and excellent of audit engagement.

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