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    A Summary of Research and Enforcement Release Evidence on...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.10 Confirmation – Process and Evaluation of Responses 
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    Title:
    A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness.
    Practical Implications:

    The review of AAERs identified failure to authenticate responses, collusion between auditee management and customers, and concealed side agreements and special terms as specific problem areas. These findings have several implications for standard setters, practitioners, and academic researchers. First is a need to improve response rates, as well as authenticate responses. Technology, perhaps involving third-party intermediaries, can help address these issues. Second, depending on the circumstances and identified risks, auditors may need to confirm the existence of side agreements and special terms. Auditors may also need to consider the possibility of collusion in their testing strategies. In addition, confirmation requirements may need to be extended to other accounts, at least in some circumstances.

    Citation:

    Caster, P., R. J. Elder, and D. J. Janvrin. 2008. A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness. Auditing: A Journal of Practice & Theory 27 (2): 253-279.

    Keywords:
    AAER evidence, audit confirmations, audit evidence, confirmation reliability
    Purpose of the Study:

    Confirmations are extensively used and are often perceived by practitioners to be one of the most persuasive forms of audit evidence. Yet academic research has found limitations that restrict confirmation effectiveness for many management assertions. In addition, a number of problems with false and forged confirmations are identified in Accounting and Auditing Enforcement Releases (AAERs). The Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) have put confirmation evidence on their respective agendas. Academic research indicates that receivable confirmations can be effective evidence for the existence assertion. Low response rates, as well as respondent errors and directional bias in detecting errors, are key barriers to confirmation effectiveness. This study provides a synthesis of academic and practitioner research on confirmation use and effectiveness.

    Design/Method/ Approach:

    The authors conducted a review of the academic literature on confirmations. They found few current papers examining confirmations. Most prior research addressed the effectiveness of confirmation of accounts receivable. To provide additional evidence relevant to questions in the SAG briefing paper involving confirmation of other accounts, they reviewed AAERs and practitioner literature. They identified 113 confirmation-related AAERs involving 51 auditees.

    Findings:

    The authors’ primary findings are:

    • Currently, some auditors choose not to confirm accounts receivable without justifying how they met one or more of the criteria in Statement on Auditing Standards (SAS) No. 67 for not confirming the accounts.
    • Generally, confirmations are relatively effective in testing the existence assertion for accounts receivable. However, low response rates have a negative impact on confirmation effectiveness.
    • Anecdotal evidence and some research suggest confirmation response rates are declining. Research has identified several methods to improve response rates.
    • Confirmations are also somewhat effective in examining the valuation assertion for accounts receivable. However, confirmees fail to detect many seeded errors in controlled experiments and are more likely to detect and report errors that are unfavorable to the confirmee rather than favorable errors.
    • Collusion between auditee management and the confirmee was a problem area in receivables confirmations identified from AAERs. The relationship between management and the confirmee calls into question the perception by auditors of confirmees as “independent” third parties.
    • Fictitious responses provided by auditee management were a problem area identified from a review of AAERs for accounts receivable and cash balance confirmations. Current auditing standards do not require auditors to authenticate responses.
    • Enforcement actions described in the AAERs indicated problems with bank confirmations. With the exception of accounts receivable, U.S. auditing standards related to confirmations do not provide explicit guidance for specific accounts, such as cash, marketable securities or other account balances, as well as confirmation of special terms or side agreements.
    • Considerable evidence exists that electronic confirmations and other forms of electronic database queries (i.e., defined views of supplier and/or customer databases) are becoming more prevalent. Technology offers alternatives to standard paper confirmations that may provide for authentication and improve confirmation effectiveness.
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses