ISA 505 (Revised) — External Confirmations

ISA 505 (Revised) DEALS with the auditor’s use of external confirmation procedures to OBTAIN audit evidence in accordance with the Requirements of ISA 330 and ISA 500.

Table of Contents

ISA 505 (Revised) – Introduction
- 1. Scope of this ISA
- 2. Effective Date
ISA 505 – Objective
ISA 505 – Definitions
ISA 505 – Requirements
Synopsis

ISA 505 (Revised) – Introduction

1. Scope of this ISA

It does NOT address inquiries regarding litigation and claims, which are dealt with in ISA 501.

2. Effective Date

This ISA is EFFECTIVE for audits of financial statements for periods beginning on or after December 15, 2009.

ISA 505 – Objective

The Objective of the ‘Auditor’ when using External Confirmation Procedures is to DESIGN and PERFORM such procedures to obtain relevant and reliable Audit Evidence.

ISA 505 – Definitions

1. External Confirmation

Audit evidence obtained as a DIRECT Written Response to the auditor from a third party in ‘Paper Form‘, or by ‘Electronic‘ or ‘Other Medium‘.

2. 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.

3. 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.

ISA 505 – Requirements

1. External Confirmation Procedures

When using ‘External Confirmation Procedures’, the auditor shall MAINTAIN control over such requests, including:

DETERMINING the information to be confirmed or requested;
SELECTING the appropriate confirming party;
DESIGNING the confirmation requests, including determining that requests are properly addressed; AND
SENDING the requests, including follow-up requests.

2. Management’s Refusal to Allow the Auditor to Send a Confirmation Request

If Management Refuses, the Auditor Shall:
(a) INQUIRE as to *Management’s Reasons* for the refusal, and seek audit evidence as to their validity and reasonableness;
(b) EVALUATE the Implications of Management’s Refusal on the auditor’s assessment of the relevant risks of Material Misstatement, including the risk of fraud; AND
(c) PERFORM alternative audit procedures designed to obtain relevant and reliable audit evidence.

3. Results of the External Confirmation Procedures

3.1 Reliability of Responses to Confirmation Requests

If the ‘Auditor’ identifies factors that give rise to DOUBTS about the reliability of the response to a confirmation request, the auditor shall OBTAIN further audit evidence to resolve these doubts.

If the ‘Auditor’ determines that a response to a confirmation request is NOT RELIABLE, the auditor shall EVALUATE the Implications on the assessment of the relevant risks of Material Misstatement, including the risk of fraud.

3.2 Non-Responses

In the case of each Non-Response, the auditor shall PERFORM alternative audit procedures to obtain relevant and reliable audit evidence.

3.3 When a Response to a Positive Confirmation Request Is Necessary to Obtain Sufficient Appropriate Audit Evidence

If the ‘Auditor’ does not obtain such confirmation, the auditor shall DETERMINE the implications for the audit and the auditor’s opinion in accordance with ISA 705 (Revised).

3.4 Exceptions

The auditor shall INVESTIGATE exceptions to determine whether or not they are indicative of Misstatements.

4. Negative Confirmations

‘Negative Confirmations’ provide LESS persuasive audit evidence than ‘Positive Confirmations’.

Accordingly, the auditor shall NOT USE ‘Negative Confirmation’ requests as the sole substantive audit procedure to address an assessed risk of Material Misstatement at the assertion level UNLESS all of the following are present:

The auditor has assessed the risks of Material Misstatement as low;
The population of items comprises a large number of small, homogenous account balances, transactions or conditions;
A very low exception rate is expected; AND
The auditor is not aware of circumstances or conditions that would cause recipients to disregard such requests.

5. Evaluating the Evidence Obtained

The auditor shall EVALUATE whether the results of ‘External Confirmation Procedures’ provide relevant and reliable audit evidence or whether further audit evidence is necessary.

Synopsis

ISA 505 ‘External Confirmations‘ DEALS with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the Requirements of ISA 330 and ISA 500.

[500-599] Audit Evidence