ciation is pleased to provide comments on Proposed Statement on Auditing ... As noted by the Audit and Attest Standards staff, the primary difference ... Paragraph A57 provides a bulleted list for âOther situations in which external confirmation ... The Committee believes that this wording should be strengthened to encourage.
Current Issues in Auditing Volume 3, Issue 2 2009 Pages C16–C18
American Accounting Association DOI: 10.2308/ciia.2009.3.2.C16
COMMENTARY
Auditing Standards Committee Comment Letter Proposed Statement on Auditing Standards— External Confirmations Participating Committee Members Randal J. Elder, James L. Bierstaker, Paul Caster, Diane Janvrin, and Brad J. Reed
INTRODUCTION The Auditing Standards Committee of the Auditing Section of the American Accounting Association is pleased to provide comments on Proposed Statement on Auditing Standards—External Confirmations 共AICPA 2009兲. The views expressed in this letter are those of the members of the Auditing Standards Committee and do not reflect an official position of the American Accounting Association. In addition, the comments reflect the overall consensus view of the Committee, not necessarily the views of every individual member. We hope that our attached comments and suggestions are helpful and will assist in finalizing the proposed standard.
GENERAL COMMENTS The Committee commends the Auditing Standards Board 共ASB兲 for revising the audit standard on external confirmations to address changes in technology since SAS No. 67 共AICPA 1992兲 was adopted, and the continuing efforts to apply clarity drafting conventions and converge with International Standards on Auditing 共ISAs兲. The following comments address the specific questions in the guidance for respondents. Specific Comments Addressing ASB-Proposed Questions „1… Are the Objectives of the Auditor Appropriate? The committee believes that the objectives of the standard are appropriate. Additional comments that follow address the reliability of confirmations and when they should be applied. „2… Are the Revisions Made to Converge the Existing Standard with ISA 505 Appropriate? As noted by the Audit and Attest Standards staff, the primary difference between the requirements of the proposed standard and ISA 505 共IAASB 2009兲 are the presumptive requirement to confirm accounts receivable. The Committee agrees that this requirement is appropriate for the U.S. environment, particularly to address the existence assertion. Revenue recognition concerns identified in SAS No. 99 共AICPA 2002兲 and in Beasley et al. 共1999兲, including special terms and the use of side agreements, suggest the continued need for confirmations as part of the audit. We recommend that the standard include explanatory language that explains the presumptive requirement for accounts receivable confirmations. For example, Paragraph 19b in the conforming Submitted: 27 September 2009 Accepted: 14 October 2009 Published: 4 December 2009
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amendments to Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained 共see Paragraph A29, Appendix兲 could include the following introductory sentence: “Confirmations are used in part to address revenue recognition and the existence assertion for receivables.” „3… Are the Differences between the Proposed SAS and ISA 505 Identified in the Exhibit, and Other Language Changes, Appropriate? The Committee believes that the inclusion of the auditor’s direct access to information held by a third party in the definition of an external confirmation in Paragraph 6 is appropriate. The guidance in Paragraphs A12 and A14 also is helpful in clarifying the reliability of electronic confirmations. We believe that it would be helpful to reference a definition of electronic confirmation in Paragraph 2. The Committee also believes that the guidance on oral responses in Paragraphs A22–A23 is appropriate in clarifying that an oral response does not meet the definition of a confirmation, and the extent to which oral responses may be used as audit evidence. Other Comments Reliability of Confirmations as Independent Evidence Paragraph 2 indicates “Audit evidence is more reliable when it is obtained from independent sources outside the entity.” Paragraph A11 indicates that “even when audit evidence is obtained from sources external to the entity, circumstances may exist that affect its reliability. All responses carry some risk of interception, alteration, or fraud.” The bulleted examples that follow involve interception or fraudulent responses. However, evidence from Accounting and Auditing Enforcement Releases in Janvrin et al. 共2010兲 suggests that collusion between clients and customers is a more common problem. The use of the term “independent” when referring to confirmations is used to distinguish them from related party confirmations. However, the term “third-party sources” may be preferable to “independent sources.” More importantly, the bulleted examples in Paragraph A11 should include an example of fraud involving collusion. Paragraph A13 should discuss situations in which evidence suggests that the confirmation respondent is not fully independent of the client. Management’s Refusal to Allow the Auditor to Send a Confirmation Request The Committee believes that the requirements in Paragraphs 8 and 9, which address the responsibilities of the auditor when management refuses to allow the auditor to send a confirmation request, including communicating with those charged with governance if the auditor concludes that management’s refusal is unreasonable, are appropriate. The guidance in Paragraph A10 indicates that, in such cases, “The alternative procedures performed may be similar to those appropriate for a nonresponse, as set out in Paragraphs A18–A20 of this SAS. Such procedures also would take into account the results of the auditor’s evaluation in Paragraph 8b of this SAS.” The effect of this guidance is that the auditor will perform the same alternative procedures as for a nonresponse, as long as the auditor concludes that management’s refusal does not increase the risk of material misstatement, including the risk of fraud. Because management’s refusal to allow the auditor to send a confirmation request is a limitation on the scope of the audit, we believe that it should be considered an increased fraud risk in most circumstances. We recommend that the guidance in Paragraph A10 indicate that the alternative procedures should generally be more extensive when management refuses to allow the auditor to send a confirmation request. Considering Whether External Confirmations are to be Performed The Committee believes that the guidance in Paragraph A29, Appendix: Conforming Amendments to Proposed Statement on Auditing Standards Performing Audit Procedures in Response to Current Issues in Auditing American Accounting Association
Volume 3, Issue 2, 2009
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Assessed Risks and Evaluating the Audit Evidence Obtained, specifically Paragraph A57a, which addresses confirmation of special terms and side agreements, is helpful in encouraging confirmation of such agreements. Paragraph A57 provides a bulleted list for “Other situations in which external confirmation procedures may provide relevant audit evidence in responding to assessed risks of material misstatement.” The Committee believes that this wording should be strengthened to encourage the use or at least the consideration of confirmations where a significant risk of material misstatement has been identified, especially for material cash balances. Determining that Requests are Properly Addressed Paragraph A6 indicates that determining whether requests are properly addressed includes testing the validity of some or all of the addresses on the confirmation requests. We believe that this wording should clarify that this is required and should be performed using information that is not obtained from the client. The guidance on electronic confirmations is helpful in describing how verification can be performed for electronic confirmations.
REFERENCES American Institute of Certified Public Accountants 共AICPA兲. 1992. The Confirmation Process. AU Section 330. New York, NY: AICPA. ——–. 2002. Consideration of Fraud in a Financial Statement Audit. AU Section 316. New York, NY: AICPA. ——–. 2009. External Confirmations. Proposed Statement on Auditing Standards. Available at: http://www.aicpa.org/ download/auditstd/FINAL_ED_External_Confirmations_2.pdf. Beasley, M. S., J. V. Carcello, and D. Hermanson. 1999. Fraudulent Financial Reporting: 1987–1997: An Analysis of U.S. Public Companies. Jersey City, NJ: Committee of Sponsoring Organizations of the Treadway Commission. International Auditing and Assurance Standards Board 共IAASB兲. 2009. External Confirmations. International Standard on Auditing 505. New York, NY: IAASB. Janvrin, D., P. Caster, and R. Elder. 2010. Enforcement release evidence on the confirmation process: Implications for standards setters. Research in Accounting Regulation 共forthcoming兲.
Current Issues in Auditing American Accounting Association
Volume 3, Issue 2, 2009
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