An external confirmationA request from an auditor that a third party verify client-provided information directly to the auditor (eg, accounts receivable confirmations, bank confirmations). is a written response sent directly to an auditor from a party outside an entity being audited. Because they provide evidence from third parties, external confirmations are among the most reliable forms of audit evidence. Confirmations are often used to verify bank balances, securities held by a broker, or accounts receivableAccounts receivable (AR) is a current asset on the balance sheet. Positive balances represent past credit sales that remain uncollected. When customers pay cash to the company, AR decreases. If customers pay for all their credit purchases before the company records more credit sales, then AR is zero. (A/R).

Because of timing differences caused by payments or goods in transit, a client's customer's books may show that the customer owes the client more or less than the client's A/R records indicate. This can make it difficult for the customer to confirm the balance, potentially leading the customer to not reply. To mitigate this risk, the auditor can include a list of items or invoices that constitute the customer's account balances, thereby allowing the customer to reconcileThe process of comparing two accounting records from different sources to identify discrepancies between them. the amounts.

(Choice A) Customers with large balances may or may not be more likely to respond. Moreover, if customers with large balances make up only a small portion of the client's A/R balance, confirming only their A/R may not be an option.

(Choice C) Customers understand that the auditor (an independent third party) will investigate material differences.

(Choice D) To prevent the risk that management will alter confirmations, it is essential that the auditor send and receive confirmations directly.

Things to remember:
Accounts receivable (A/R) confirmations are an important tool auditors use to verify A/R account balances with other parties. Including a list of invoices when sending A/R confirmation requests can increase the response rate.