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During the verification process, confirmation letters are used to communicate directly with third parties for the purpose of obtaining independent verification of certain financial information which is often used for cash, debt, or legal matters.
The two types of confirmations are:
- Positive – Requesting a response. Typically asked to communicate specific information or indicate if you agree or disagree.
- Negative – Only request response if you disagree with the information indicated in the confirmation.
Vouching is just as important. Vouching is basic audit procedure whereby original evidence is examined to determine if it supports the information included in the accounting records. Vouching is used to determine accuracy, detect fraud, verify compliance, and establish confidence in controls and/or financial information.
During the substantive testing phase of the audit, we perform recalculations. It allows us to independently verify mathematical accuracy of financial statement data. Recalculations are often performed when testing depreciation, tax provisions, and significant estimates.
In verifying account balances, external markets play a role in its reliability. External market data can be useful when assets are traded on or valued by external markets. This data is most often used for inventory and investments. The key when utilizing external market information is the creditability and comparability of market data.
What sets 415 Group Apart?
- Experience – We offer a full range of services with deep expertise across key industries. This enables us to understand and navigate our clients’ unique regulatory and operational challenges.
- Reputation – Our firm is known for dependable service, high-quality work, and consistent client satisfaction.
- Communication – It’s imperative to have a strong working relationship with your accounting team. Our client service teams are extremely capable, accessible, and proactive.
- Competitive Pricing – We offer competitive and straightforward pricing, ensuring you always know what to expect.
Ultimately, it’s about the people. At 415 Group, our professionals are extremely knowledgeable, have an impeccable reputation, strive to build a relationship with each of our clients and aim to provide the highest value for your investment. Contact us today to begin the conversation.
Audit season is just around the corner for calendar-year entities. Understanding the types of source documents your audit team might request can minimize disruptions during audit fieldwork and maximize your audit’s effectiveness. Here are some common sources of “substantive evidence” that auditors gather to help them form an opinion regarding your financial statements.
Original source documents
Auditors can verify account balances or records by vouching (or comparing them to third-party documentation). For example, an auditor might verify the existence of a vehicle on your company’s fixed asset list by reviewing the invoice from the seller. This process allows auditors to evaluate the accuracy of amounts claimed by the company and whether the company recorded transactions correctly in its accounting system.
Physical observations
Seeing is believing. Auditors sometimes verify the existence of assets through physical observations and inspections. For example, inventory audit procedures typically include:
- Observing or conducting a physical inventory count,
- Inspecting the process to record incoming and outgoing inventory, and
- Analyzing the inventory obsolescence process.
Confirmation letters
Auditors commonly send confirmations to third parties, asking them to verify such items as cash, accounts receivable, accounts payable, employee benefit plans and pending litigation. There are three types of confirmations:
- Positive. Recipients are requested to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.
- Negative. Recipients are requested to reply directly to the auditor only if they disagree with the information presented in the confirmation.
- Blank. This type of request doesn’t state the amounts (or other information). Instead, it requests recipients to complete a blank confirmation form.
In the past, auditors sent out confirmation letters through the U.S. Postal Service. Although written confirmations are still permitted, auditors routinely use electronic confirmations today. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider. Some financial institutions no longer respond to paper confirmation requests and will respond only to electronic confirmation requests.
External market data
For assets actively traded on the open market, auditors may verify amounts claimed on the company’s financial statements by researching pricing data. For example, if the company invests in marketable securities it plans to sell within one year, an auditor could analyze the prevailing market price to confirm their book value. Similarly, auditors may sample inventory items and compare them to online pricing sheets to ensure items are reported at the lower of cost or market value.
Recalculations
Auditors may verify in-house schedules and records by independently recalculating them. If the auditor’s work matches the client’s work, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses (for example, overtime, benefits and tax payments).
Let’s work together
To streamline your upcoming audit, let’s discuss the types of substantive evidence we expect to gather for each major financial statement category. We can help you anticipate document requests and inquiries, thereby facilitating audit fieldwork.
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