Negative confirmation is an audit procedure that is used to confirm the balance between the client’s records and third-party records.
This procedure is often used when there is a high degree of risk associated with the balance. The balance is large or there has been a recent change in management.
The auditor will send a letter to the third party, asking them to confirm that the balance on the client’s records is accurate. If the third party does not respond within a certain period of time, then the auditor will assume that the balance is correct. This procedure helps to reduce the risk of error in the audit.
Audit confirmation is the process of verifying information that has been provided by a client and third party. This may involve sending a letter to the other parties and asking them to respond if the balance is correct. Audit confirmation aims to obtain reliable evidence about a company’s financial information to make an informed opinion about its accounts.
Auditors can use the audit confirmation procedure over several accounts. The accounting record must have a connection with the external parties such as accounts receivable, payable, and so on. Please refer to the following accounts:
- Accounts Receivable: When the company records account receivable, the company’s customer will record accounts payable. Both balances must be the same otherwise, it will be a mistake between the two parties. Auditors can send confirmation to the company’s customers to ensure that the account receivable balance is correct.
- Accounts Payable confirmation: Similarly, when the company records account payable, the supplier will record the accounts receivable. Both balances must be the same, so auditors can send the confirmation to the supplier to ensure the balance record on their client.
- Bank confirmation: this confirmation is one of the popular confirmations that auditors must do to check with the bank. Auditors want to ensure that the cash on the company balance sheet is the same as the bank recorded.
- Donor confirmation: It is applicable to the Nonprofit entity which receives the donation from the major donor. Auditors can send the confirmation to the donor to confirm the amount donated in the period.
Type of Audit Confirmation
There are two types of audit confirmations: positive and negative.
Positive confirmations: The auditors send confirmation to the third parties and ask them to respond back with their recorded balance. Then auditors will compare client balance with the third parties.
Negative confirmations: The auditors send confirmation with the client’s balance and ask the third parties to respond if the balance is not correct. When the auditor does not receive a response or the response disagrees, they will assume that the balance is correct.
Limitation of audit confirmation
- Not applicable for all situations
Auditors may not be able to use the confirmation in all situations. It may not be able to send confirmation for accounts receivable and accounts payable if the transactions are small and spread over many suppliers/customers. It is not effective and efficient to confirm the balance. Auditors need to use other audit procedures to verify the accounts.
- Not get respond
Not all the recipients will respond to the confirmation. Some of them do not understand the purpose of sending confirmation. Some of them do not know how to respond and so on.
- Loss along the ways
If auditors send the physical confirmation, it is easy to get lost along the way. The confirmation may not reach the recipients or it loses along the way back to the auditor. It will be less reliable to send the electronic confirmation by email or other forms.
- Not enough coverage
The confirmation may not be able to cover all the balance in each account. There will be many small transactions that are impossible to confirm. Auditors need to perform other testing procedures to cover the remaining balance.