(i) Four examples of external confirmations are:
•• Accounts receivable letter
•• Solicitor letter
•• Bank report letter
•• Inventory held by third parties.
(ii)
Accounts receivable letter
•• This letter provides evidence of the existence of the receivable when a reply is returned
from that receivable direct to the auditor.
•• The letter provides evidence on cut-off because sales or cash receipts recorded in the
incorrect accounting period will have to be reconciled to the balance provided by the
receivable.
•• The letter does not provide evidence of completeness of the receivables balance
because receivables may not query balances which are understated.
•• The letter does not provide evidence of the valuation of the receivables balance because
the receivable cannot be expected to list all outstanding balances and confirmation of
the debt does not mean it will be paid.
Solicitor letter
A solicitor letter provides evidence as to the existence of claims at the period end as the
solicitor will confirm specific claims.
However, the letter does not necessarily confirm the valuation of claims due to uncertainty
about the future or the completeness of any legal claims as solicitors do not normally provide
a list of all claims but they prefer to comment only on claims they are actually asked about.
Bank report letter
A bank confirmation letter provides good evidence on the existence of the company’s bank
accounts as the bank has confirmed this information in writing.
A bank letter cannot necessarily be relied on to provide complete or accurate information.
Most banks place a disclaimer on the letter of ‘errors and omissions exempted’ indicating
that the auditor must review this evidence against other cash and bank evidence obtained.
Inventory held by third parties
A letter from the third party holding the inventory will provide evidence of the existence of
that inventory because the third party has confirmed this in writing.
However, the letter does not provide evidence regarding the valuation of the inventory;
confirming something exists does not necessarily mean it is in good condition.
Wilfykil answered the question on April 13, 2019 at 07:33
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