PCAOB proposes a New Audit Confirmation Standard

AS 2310, “The Confirmation Process”

Presently, the confirmation process that needs to be followed by an auditor while obtaining third- party confirmation as a part of an audit of company’s financial statements is described by AS 2310 , which was initially written over 30 years ago and was adopted by PCAOB in 2003.
Taking into consideration the advancement in audit technology and to improvise the audit quality, The Public Company Accounting Oversight Board (PCAOB) is proposing to replace its old AS 2310, “The Confirmation Process” with a new proposed standard AS 2310, “The Auditor’s Use of Confirmation”.

Scope of the Existing Standard:

Existing AS 2310 explains the confirmation process as obtaining and evaluating a direct communication from third party in response to a request for information about a particular item affecting financial statement assertion.
It guides the auditor on:

• Which areas require confirmation from third party? E.g. Accounts receivables
• How to design a confirmation request using both positive and negative confirmation requests?
• How to ensure auditor’s control over the requests and responses received without client’s interference?
• What alternative procedures to be performed in case the auditor does not receive any response to his confirmation requests?
• Lastly, if the confirmations and alternative procedures do not provide sufficient appropriate evidence, then what additional procedures need to be followed?

Scope of the Proposed Standard:

The new proposed standard is designed to enhance existing confirmation requirements by :

• Including more principles-based requirements that are designed to apply to all methods of confirmation.
• Clearly specifying certain risk-based considerations and emphasizing the auditor’s responsibilities for obtaining relevant and reliable audit evidence through confirmation.
• Adding a new requirement of confirming the cash held by third parties.
• Addressing the situations when the presumption to confirm accounts receivable may be overcome and the auditor may perform other substantive procedures instead of confirmation and obtain audit evidence that is at least as persuasive as the evidence the auditor might expect to obtain through confirmation.
• Providing more specific direction for circumstances where the auditor is unable to obtain relevant and reliable audit evidence through confirmation. It would include examples of such alternative procedures that may provide relevant and reliable audit evidence.
• Identifying the activities in the confirmation process for which the auditor may not use internal auditors to provide direct assistance.

Conclusion:

Thus, we believe that the new proposed standard would help in:

• Strengthening the requirements of obtaining reliable audit evidence from the confirmation process in certain important areas; and
• Modernizing AS 2310 to accommodate certain developments in practice, including the use of electronic communications, intermediaries, and new audit tools.

Also, it is expected to promote consistent and effective practice relating to the confirmation process in audits subject to PCAOB standards thereby, reducing the risk of low-quality audits caused by the lack of observability of audit quality and the influence of the auditor client relationship.

Manasvi, Audit Executive, SW India

#SWIndia #InsightsbySW #audit #pcaob