top of page
  • Writer's pictureDaniel Goelzer

PCAOB Proposes to Modernize Confirmations

On December 20, the PCAOB issued for public comment a proposal to modernize its standard on the use of confirmations in audits. The confirmation process involves obtaining audit evidence about financial statement assertions by sending requests to outside parties asking that they confirm information in the company’s records. Confirmation of accounts receivable, which has been presumptively required in the United States since 1939, is the most common example of the use of confirmations in an audit.

According to the PCAOB’s release soliciting public comment, the proposed new standard embodies “principles-based requirements that apply to all methods of confirmation, including paper-based and electronic means of communications” and would be integrated with the Board’s risk assessment standards. Key provisions of the Board’s proposal include:

  • Continuation of the existing requirement to confirm accounts receivable. The standard would permit the use of alternative audit procedures instead of confirmation if the auditor determines that the other procedures would provide audit evidence that is at least as persuasive as evidence the auditor might expect to obtain through confirmation. The auditor would be required to inform the audit committee of instances where the auditor determined that the presumption to confirm accounts receivable has been overcome.

  • A new requirement to confirm cash held by third parties. The auditor would not necessarily need to confirm every cash account, but “would select individual cash items to confirm following the relevant direction in PCAOB standards, including identifying and assessing the risk of misstatement and developing an audit response.” The new proposed standard would not, however, address the possibility of using alternative procedures instead of cash confirmation. The release states that “the Board is not aware of other types of substantive procedures that would provide audit evidence that is as persuasive as audit evidence obtained through confirmation of cash.”

  • A prohibition against the use of negative confirmations as the sole substantive audit procedure for addressing a financial statement assertion. Negative confirmations are requests that do not call for a response if the confirming party agrees with the information in the confirmation request. Although negative confirmation alone would not provide sufficient appropriate audit evidence, auditors would be allowed to use negative confirmation requests to supplement other substantive audit procedures.

  • A prohibition against direct participation by the company’s internal audit staff in the confirmation process. The release states that internal auditors’ involvement in such activities as selecting items to be confirmed or in sending confirmations or receiving responses “would create a risk that information exchanged between the auditor and the confirming party is intercepted and altered.” Internal audit personnel could assist in administrative aspects of the confirmation process, such as preparing the confirmation request and researching differences in confirmation responses.

If the proposal is adopted, audit committees may find that auditors will begin to use confirmation procedures more frequently than has been traditional. Apart from the specific situations in which the proposed standard would require the use of confirmations, the release seems to encourage third party confirmation. For example, the release states, “In situations involving fraud risks and significant unusual transactions, audit evidence obtained through the confirmation process generally is more persuasive than audit evidence obtained solely through other procedures.” Auditors may interpret this as a directive to use confirmation procedures wherever possible as a tool to address fraud risk.

33 views0 comments

Recent Posts

See All

Ceres Advocates Climate Disclosure Reasonable Assurance

Ceres, a nonprofit organization that works with capital market leaders to address sustainability challenges, has released Closing the Gap: Investor Insights into Decision-Useful Climate Data Assurance


bottom of page