Are bank confirmations required for an audit

Bank confirmation is the auditor’s audit procedure to test the existence, accuracy, and ownership of the bank account and bank balance of the entity.

This procedure is normally performed during the interim audit rather than at the completion stage. However, if there is no interim, then it is performed at the final fieldwork the same as other procedures.

Banks’ balance, accuracy, and ownership are very important for auditors, especially for some countries, since the risks that information could be manipulated are different from country to country.

In most cases, banks balance is what auditors focus more on, but ownership of management or the company for the bank account is also very important.

Normally, auditors review the bank’s balance and select some important accounts to be confirmed during the interim audit. Auditors draft the confirmation and send it to the client to review and get the confirmation signed.

Once the confirmation is signed, auditors are the one who proceeds with the confirmation to banks. The bank confirmation is normally the positive confirmation, and all the confirmations are responding to auditors.

For the best practices, auditors should prepare the schedule and control sheet to control the completeness of sending, receipts, and confirmation.

Bank Confirmation Letter:

A Bank confirmation letter is the letter prepared by auditees as the request by the auditor during the audit process to confirm the balance, transactions, and ownership of the bank account. This letter is prepared by the auditee and sent to the bank directly by the auditor. It should not send by the auditee.

Related article  What is Pre-Audit? Definition, Process, and Requirement

Once the bank received the letter, the bank will also need to send it directly to the auditor. Not auditees. If the auditor noted that the auditee sent the confirmation to the bank, then the auditor needs to send the letter to the bank again.

What is the information that should be included in the letter?

Although the auditee prepares the confirmation letter, the template is normally provided by the auditor. There is much information that needs to be included in the letter, which is depending on the auditor’s objective and the requirement of each and individual bank.

When we prepare the bank confirmation letter, the three parties’ information needs to be included in the letter. These include the bank that the letter will send to, auditee information, and auditor information. In general, the following information is included in the bank confirmation.

Bank information:

The bank’s information that should be included in the bank confirmation letter should be:

• Bank of the bank or branches
• Address of the bank including physical location, website, email, and department (Some bank need this informaiton)

Auditee information:

• Company’s name with logo of auditee
• Facilities to be confirmed
• Period or date to be confirmed
• Authorise signature (Bank will not respond without this)

Auditor information:

Auditor information will also need to include the bank’s response to the confirmation letter directly to the auditor. So the information of the auditor that needs to include are

(i) A bank confirmation has not been received despite extensive follow up by the client. As the deadline is close, the client has provided you the original bank statement of 31 December 2016 duly stamped and signed by the Bank Manager. Consequently, the client is of the opinion that confirmation is no more necessary.

(ii) At the planning stage of audit of Orange Limited, the management has refused to send confirmations to three major debtors who constitute 45% of the total debtors. On inquiry, you have been informed that these debtors are partnership concerns and take lot of time in replying to confirmation requests. However, as an alternative the management has offered to send negative confirmation requests.

Discuss how you would deal with the above situations. Also state the possible implications on the audit report.

Bank Confirmation

• Bank confirmation contains details such as facilities, securities, additional banking relationships, trade finance, derivative and commodity trading and custodian arrangements. These information are not available in bank statement. Moreover, the bank confirmation is supposed to be received directly from the bank whereas the bank statement has been received through the client.
• We need to determine whether a response to a positive confirmation is necessary to obtain sufficient appropriate audit evidence related to bank balance as at December 31, 2013.
• If it is concluded that the response to bank confirmation is not necessary then we would perform alternate audit procedures to obtain sufficient appropriate audit evidence relating to details not provided by the bank.
• If we are unable to obtain sufficient appropriate audit evidence from alternative audit procedures or if we conclude that the response to the bank confirmation is necessary and we are unable to obtain bank confirmation, then it will constitute a scope limitation. Accordingly, we would qualify the audit report or issue a disclaimer of opinion depending on the materiality and pervasiveness of the matter.

Bank Confirmation Process

• The request by management for sending negative confirmation requests is not appropriate as these are usually sent when population comprises of large number of small account balances.
• The reason provided by the management for not sending confirmation request to three debtors is not appropriate.
• In view of the above, we would ask the client to send positive confirmation request.
• If the client refuses to send positive confirmation, we would evaluate the implications of the refusal on the risk of material misstatement, including the risk of fraud and on the nature timing and extent of other audit procedures.
• Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
• If we are unable to obtain sufficient appropriate audit evidence form alternative audit procedures or if we conclude that the confirmation is necessary and we are unable to obtain confirmation from the debtors, then it will constitute scope limitation. Based on the materiality and pervasiveness of the matter, we would issue a qualified or disclaimer of opinion as appropriate.

For more external confirmation case study keep visiting auditorforum.com. External confirmation is discussed at Auditorforum.com in detail in further posts.We are keen to know your feedback.

Are bank confirmations required?

Are bank confirmations required for an audit UK?

What is audit confirmation in bank?

What is the purpose of a bank confirmation?