External confirmation is the process of obtaining a written representation of information of an existing condition directly from third party.
External confirmation is one of audit procedure used in obtaining audit evidence. External confirmation can divided into positive external confirmation and negative external confirmation.
Positive external confirmation is the request which ask the respondent to reply to the auditor in all cases, whether he agrees with the information provided in the confirmation or not. The risk associated with the positive confirmation is that the respondent may reply to the request without verifying that the information is correct. The auditor is not ordinarily able to detect whether this has occurred. The auditor may reduce this risk, by using positive confirmation requests that do not state the amount (or other information) on the confirmation request, but ask the respondent to fill in the amount or furnish other information
Negative external information is type of external confirmation in which auditor send request which ask the respondent to reply only in the event of disagreement with the information provided in the request. The risk associated with negative external confirmation is that when no response is received, there is no explicit audit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. Accordingly the use of negative external confirmation requests ordinarily provides less reliable audit evidence than the use of positive external confirmation requests. The auditor should considers performing other substantive procedures to supplement the use of negative external confirmation. Negative external confirmation request may be used under one or more of the following circumstances
- The risk of assessed risk of material misstatement is lower
- A large number of small balances is involved
- Substantial number of errors are not expected
- The auditor has no reason to believe that respondents will disregard the request
sometimes the auditor can use the combination of both positive external confirmation and negative external confirmation. combination of positive and negative external confirmation may be used, for example, where the account receivables comprise a small number of large balances and a large number of small balances
the auditor may then decide that it is appropriate to confirm all or sample of the large balances with positive confirmation requests and sample of the small using negative external confirmation requests