Negative Confirmation

What Is Negative Confirmation?

Negative Confirmation is a document that contains auditors' request for a response from a third party, typically a customer or vendor, only if they disagree with the information contained in the audited entity's records. The purpose of negative confirmations is to let the auditors learn about the discrepancies between the real figures maintained by the client company and the records prepared by themselves. 

A negative confirmation is a cost-effective and efficient way for auditors to obtain evidence about the accuracy and completeness of a company's financial records. By requesting a response only if the customer or vendor disagrees with the recorded information, auditors can put their resources to work on resolving exceptions or discrepancies.

• Negative confirmation, in auditing, refers to a type of audit evidence-gathering procedure where auditors send requests for confirmation to third parties, asking them to respond only if they disagree with the information provided in the request.
• The process allows auditors to identify and rectify discrepancies if pointed out by the respondents. 
• Negative confirmation is considered a less reliable form of evidence compared to positive confirmation, as auditors are not sure if everyone who disagrees with the shared information has responded.
• The primary benefit of negative confirmation in auditing is that it can be a cost-effective way to obtain audit evidence. 

Negative Confirmation Explained 

Negative confirmation in auditing signifies a letter through which auditors send inquiries to the intended recipients, asking them to respond only if they disagree with a statement recorded. This approach is used to test the completeness of a company's financial records or to detect errors or fraud. The document is typically related to a specific account balance, transaction, or activity. 

The recipient is asked to respond to the inquiry within a specified timeframe by stating any disagreements. On the contrary, if the recipients have no disagreements, they would not be required to respond to the letter. Negative confirmations are called so as these documents invite negative responses from the clients' customers, rather than expecting every vendor or customer to respond to the same.

Negative confirmation can be a useful audit tool, but it is not foolproof. There are several limitations to this approach, including the possibility of the recipients not responding to the document even if they disagree with a statement. Another reason behind these documents getting no response could be their lack of understanding of the inquiry or data. As a result, it is often used in conjunction with other audit procedures to provide a more comprehensive picture of a company's financial position.

It can be used to test the accuracy of account balances, such as accounts receivable or accounts payable balances. By sending a request to a sample of customers or vendors, the auditor can obtain evidence about the accuracy of the recorded balances.

Examples

Let us look at the instances below to understand the negative confirmation meaning in auditing better: 

Example #1

Assume that an auditor, Kelly, is conducting an audit of accounts receivable for a company. She decides to get the discrepancies, if any, identified and cross-checked by the client company. She selects a sample of accounts from the accounts receivable ledger and sends letters to the customers with outstanding balances. This document includes a statement reflecting a customer's account balance as $X until Feb 20, 2024, and asks customers to respond only if they disagree with the balance.

In this scenario, Kelly decides to assume a positive response if a customer doesn't respond at all. She would consider such customers confirming the balance amount to be accurate. On the other hand, if a customer disagreed with the balance, the auditor would investigate further to determine the reason for the discrepancy. This is how this negative confirmation mechanism serves to be effective, thereby helping auditing entities deal with a large number of accounts easily.

Example #2

In December 2022, the Public Company Accounting Oversight Board (PCAOB) introduced some changes to the confirmation procedures that auditors have been using for long. These changes were introduced as AS2310: The Auditor's Use of Confirmation. The authorities decided so, given the ineffectiveness of the traditional methods of confirmation that the auditing firms have been using. This outdated version list also included the negative confirmation procedure.

This US audit watchdog, however, confirmed that the negative confirmation letters are effective to an extent. Still, to make them have a noteworthy impact, the audit entities must have substantive procedures to support and prove the completeness and accuracy of records.

Negative Confirmation vs Positive Confirmation

The difference between positive and negative confirmation is as follows: 

• Positive confirmation requires the recipient to respond to the statements, either by confirming the accuracy or by indicating any discrepancies. On the other hand, negative confirmation requires the recipient to respond only if they disagree with the statement in the inquiry.
• Positive confirmation is generally considered to be a more reliable form of confirmation because it provides direct evidence of the accuracy of the information being confirmed. On the contrary, negative confirmation can be a useful alternative in certain situations, particularly when dealing with a large number of accounts or when the cost of implementing positive confirmation outweighs the potential benefits.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to what is Negative Confirmation. Here, we explain the concept along with its differences with positive confirmation and examples. You may also find some useful articles here -

• Threats To Auditor Independence
• Audit Report Qualified Opinion
• Audit Engagement Letter