External confirmations
Proposed International Standard on Auditing issued by the International Auditing Practices Committee
Comments by the Association of Chartered Certified Accountants
General
1. The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the proposed International Standard on Auditing (ISA) 501, External Confirmations.
2. We do not consider detailed procedural guidance of the type contained in this Exposure Draft to be the proper subject of an International Standard on Auditing. We do not see any logic for treating audit evidence issues in relation to accounts receivable or stocks held by third parties, for example, as different from other areas of audit work, and thus no reason to have a special ISA for these issues. It would be more appropriate for the material to be issued as guidance in a Practice Statement. If the International Auditing Practices Committee (IAPC) does consider that there are particular principles and essential procedures which need to be set out in a Standard, then the text of the ISA should be restricted to those key points, and purely illustrative material transferred to an appendix.
3. We appreciate, however, that this proposed revision to the existing ISA 501 represents a relaxation of the Standard, which requires auditors to obtain direct confirmation of accounts receivable unless the amounts involved are immaterial, or where it would not be reasonable to expect the debtors to respond.
4. We recommend that the review of ISA 501 be extended to Part C, which deals with auditors' enquiries regarding litigation and claims. The objections to this section - that it is overly detailed and prescriptive - are the same as those which applied to section B. It may not be realistic to expect the requirements to be applied universally, when local constraints and legal convention may render the procedure ineffective.
Issues on which IAPC has asked for comments
5. Commentators are asked whether they support the less prescriptive approach of the revised guidance. ACCA supports the change in that, for those countries where International Standards on Auditing are translated to become national auditing standards, or form the basis of national standards, the approach suggested is to be welcomed as being more practical than the current requirements of ISA 501. On the other hand, in those countries such as the UK or Ireland, where national standards are developed having regard to ISAs, but on an independent basis, it is unlikely to be considered appropriate to include detailed procedural material of the sort suggested in the body of auditing standards.
6. Commentators are asked whether they anticipate problems' being caused by permitting the new Standard to be followed before the stated date. Because the revision introduces less prescriptive requirements, although applying to a wider range of evidence issues, we do not consider that allowing early implementation will cause difficulties. On the other hand, it might be better to leave the decision, as to whether to allow auditors to adopt the new ISA before the official implementation date, to the authorities responsible for auditors' conduct in the countries represented by IFAC member bodies.
7. IAPC wishes to know whether there are any terms, phrases, or concepts in the Standard that would be particularly difficult to translate into other languages or that might be ambiguous when translated. Those of our members whose first language is not English have not identified any difficulties on this point.
Other points
8. Paragraph 3 of the proposed ISA states that "in general, audit evidence from external sources is more reliable than audit evidence generated internally". In our experience, responses to external confirmation requests are seldom prepared with care and are often found to be unreliable as a result. The uncritical view expressed by the ISA should be qualified.
9. Paragraph 7 points out that external confirmations of accounts receivable do not ordinarily provide audit evidence relating to the valuation assertion, since it does not cover the debtor's ability to pay the amount due. Neither can the debtor's reply be relied on to provide evidence as to the completeness assertion, since debtors may not choose to point out apparent omissions from their statements.
10. The material in paragraphs 16 and 17 is surely too detailed for inclusion in a standard on auditing, but if such practical 'how to' guidance is to be included, it could add that an alternative to client management authorisation to disclose information would be for the client themselves to write to the third party, requesting reply direct to the auditor.
11. We do not consider that negative confirmations are useful in providing substantive audit evidence. The procedure is seldom used and it is arguable that it should not be encouraged in a document of this nature. There are many reasons for a non reply which means that it would be unsafe to assume that no reply indicated acceptance of the assertion in question.
12. We disagree with the requirement set out in paragraph 24 that, if the auditor does not accept the validity of a management request not to seek confirmation of certain information, and is prevented from carrying out the confirmations, there has been a limitation on the scope of the auditors' work and the auditor should consider the possible impact on the report. This course of action is only appropriate where the auditor is unable to obtain sufficient alternative evidence.
13. We question whether paragraphs 30 and 31 are necessary in this document, as they simply repeat the principles set out in ISA 500.
14. We consider the material in paragraph 37 to be both weak and impractical. Further tests of detail are unlikely to yield any more evidence than a properly designed positive confirmation request, as are analytical procedures. On the contrary, if these procedures are deemed to be more effective in providing audit evidence than external confirmations, then it would be sensible for the auditors to plan to use these methods instead.