HKSA 505 - External Confirmations (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Introduction (Para 1-4) | Scope & Effective Date | HKSA 505 covers auditor's use of external confirmations; effective for periods beginning on/after 15 Dec 2009. |
| Objective (Para 5) | Objective | Design and perform procedures to obtain relevant and reliable audit evidence. |
| Definitions (Para 6) | Key Terms | External confirmation, positive/negative request, non-response, exception. |
| External Confirmation Procedures (Para 7) | Control Over Requests | Auditor must maintain control: determine info, select party, design request, send & follow up. |
| Management Refusal (Para 8-9) | Refusal Handling | Inquire reasons, evaluate impact, perform alternatives; if unreasonable, communicate with TCWG. |
| Results โ Reliability (Para 10-11) | Reliability of Responses | Resolve doubts; if unreliable, reassess risks and modify procedures. |
| Results โ Non-Responses & Exceptions (Para 12-14) | Non-Responses & Exceptions | Perform alternative procedures for non-responses; investigate exceptions for misstatements. |
| Negative Confirmations (Para 15) | Negative Confirmations | Less persuasive; only as sole procedure if all four conditions met. |
| Evaluating Evidence (Para 16) | Evaluation | Assess if results provide relevant and reliable evidence or if further evidence needed. |
| Appendices 1-2 | Bank Confirmations | Local guidance on bank confirmation requests; standard form in Appendix 2. |
Introduction & Objective (Para 1-5)
Introduction & Objective
Scope (Para 1)
HKSA 505 deals with the auditor's use of external confirmation procedures to obtain audit evidence in accordance with HKSA 330 and HKSA 500. It does not address inquiries regarding litigation and claims (covered in HKSA 501).
External Confirmation Procedures (Para 2-3)
Reliability of audit evidence is influenced by its source, nature, and circumstances. Evidence is more reliable when:
- Obtained from independent sources outside the entity
- Obtained directly by the auditor
- Exists in documentary form
Effective Date (Para 4)
Effective for audits of financial statements for periods beginning on or after 15 December 2009.
Objective (Para 5)
The objective is to design and perform external confirmation procedures to obtain relevant and reliable audit evidence.
Definitions (Para 6)
Definitions
| Term | Definition |
|---|---|
| External confirmation | Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper, electronic, or other medium. |
| Positive confirmation request | A request that the confirming party respond directly to the auditor indicating agreement or disagreement, or providing requested information. |
| Negative confirmation request | A request that the confirming party respond directly only if they disagree with the information provided. |
| Non-response | Failure of the confirming party to respond (or fully respond) to a positive confirmation request, or a request returned undelivered. |
| Exception | A response indicating a difference between information requested/contained in entity's records and information provided by the confirming party. |
External Confirmation Procedures (Para 7)
External Confirmation Procedures
Maintaining Control (Para 7)
The auditor shall maintain control over external confirmation requests, including:
| Element | Description | Reference |
|---|---|---|
| (a) Determining information | Confirm account balances, terms of agreements, or absence of conditions (e.g., side agreements). | Para A1 |
| (b) Selecting confirming party | Choose a party knowledgeable about the information to be confirmed. | Para A2 |
| (c) Designing requests | Consider assertions, risks, layout, prior experience, communication method, management authorization, and confirming party's ability. | Para A3-A6 |
| (d) Sending requests | Send requests and follow-up if no reply within reasonable time; re-verify address if needed. | Para A7 |
Management's Refusal (Para 8-9)
Management's Refusal to Allow Confirmation
Requirements (Para 8)
If management refuses to allow a confirmation request, the auditor shall:
- Inquire as to management's reasons and seek audit evidence as to their validity and reasonableness (Para A8).
- Evaluate implications on risk assessment (including fraud risk) and on nature, timing, and extent of other audit procedures (Para A9).
- Perform alternative audit procedures to obtain relevant and reliable audit evidence (Para A10).
Unreasonable Refusal or Inability to Obtain Evidence (Para 9)
If the auditor concludes management's refusal is unreasonable or cannot obtain relevant and reliable evidence from alternatives, the auditor shall:
- Communicate with those charged with governance (HKSA 260).
- Determine implications for the audit and auditor's opinion (HKSA 705).
Results โ Reliability of Responses (Para 10-11)
Reliability of Responses
Doubts About Reliability (Para 10)
If the auditor identifies factors giving rise to doubts about reliability, the auditor shall obtain further audit evidence to resolve those doubts (Para A11-A16).
| Factor | Action |
|---|---|
| Response received indirectly | Request confirming party to respond directly in writing. |
| Response not from intended party | Verify source and contents by contacting the confirming party. |
| Electronic response (fax/email) | Use encryption, digital signatures, or verification procedures; consider telephoning to confirm. |
| Oral response | Does not meet definition of external confirmation; request written response. |
| Restrictive language | Does not necessarily invalidate reliability. |
Unreliable Response (Para 11)
If the auditor determines a response is unreliable, the auditor shall evaluate implications on:
- Assessment of risks of material misstatement (including fraud).
- Nature, timing, and extent of other audit procedures (Para A17).
Results โ Non-Responses & Exceptions (Para 12-14)
Non-Responses & Exceptions
Non-Responses (Para 12)
For each non-response, the auditor shall perform alternative audit procedures (Para A18-A19).
| Account Type | Alternative Procedures |
|---|---|
| Accounts receivable | Examine subsequent cash receipts, shipping documentation, and sales near period end. |
| Accounts payable | Examine subsequent cash disbursements, correspondence from third parties, and goods received notes. |
When Positive Confirmation Is Necessary (Para 13)
If the auditor determines a response to a positive confirmation request is necessary to obtain sufficient appropriate audit evidence, alternative procedures will not suffice. If no confirmation is obtained, determine implications for audit and opinion per HKSA 705 (Para A20).
Exceptions (Para 14)
The auditor shall investigate exceptions to determine whether they are indicative of misstatements (Para A21-A22). Exceptions may indicate misstatements, fraud, or internal control deficiencies. Differences due to timing, measurement, or clerical errors do not represent misstatements.
Negative Confirmations & Evaluation (Para 15-16)
Negative Confirmations & Evaluation
Negative Confirmations (Para 15)
Negative confirmations provide less persuasive audit evidence than positive confirmations. The auditor shall not use them as the sole substantive procedure unless all of the following conditions are present:
| Condition | Description |
|---|---|
| (a) | Risk of material misstatement assessed as low AND sufficient evidence on operating effectiveness of controls obtained. |
| (b) | Population comprises a large number of small, homogeneous account balances, transactions, or conditions. |
| (c) | Very low exception rate expected. |
| (d) | Auditor not aware of circumstances that would cause recipients to disregard such requests. |
Evaluating Evidence Obtained (Para 16)
The auditor shall evaluate whether the results of external confirmation procedures provide relevant and reliable audit evidence, or whether further audit evidence is necessary (Para A24-A25). Results can be categorized as:
- Response indicating agreement or providing requested information without exception.
- Response deemed unreliable.
- Non-response.
- Response indicating an exception.
Appendices โ Bank Confirmations (App 1-2)
Appendices โ Bank Confirmation Requests
Appendix 1: Local Guidance
Deals with communications with members of The Hong Kong Association of Banks (HKAB). A bank confirmation request is a request for independent confirmation of account balances, securities, treasury instruments, and other information.
| Paragraph | Requirement |
|---|---|
| 5 | Auditor gains understanding of entity's banking and treasury operations. |
| 6 | Send bank confirmation requests when banking activities are significant to the audit. |
| 7 | Use of standard bank request form is beneficial. |
| 8 | If additional information needed, send separate letter. |
| 9 | Review bank's reply; additional tests may be needed if completeness is in doubt. |
| 10 | Entity completes and signs the authorization. |
Agreed Procedures with HKAB
- All requests must use the standard form (Appendix 2); may be reduced to A4 size but no smaller.
- Send forms well in advance of the confirmed balance date; late submission charges are for the entity's account.
- Submit forms in blank.
- Entity must sign authorization with chops and signatures corresponding to account mandate.
- Computer listings or printed forms acceptable if suitably identified and authenticated.
Appendix 2: Standard Bank Confirmation Request Form
The standard form (5 pages) includes items such as deposits, savings accounts, current account balances, facilities granted, loan balances, guarantees, derivative contracts, and securities held. The form concludes with a Bankers' Confirmation section.
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