What is a Negative Confirmation?A negative confirmation is a document issued by an auditor to the customers of a client company. The letter asks the customers to respond to the auditor only if they find a discrepancy between their records and the information about the client company's financial records that are supplied by the auditor. Show
Example of a Negative ConfirmationFor example, a confirmation letter tells a customer that the client company's records at year-end show an ending accounts receivable balance for that customer of $500,000. If the customer agrees with this number, it does not have to contact the auditor to confirm the supplied information. The auditor will then assume that the customer agrees with the information presented to it in the confirmation. When to Use a Negative ConfirmationA negative confirmation is designed for use in situations where a client company's internal controls are already considered to be quite strong, so that the confirmation process is used as a secondary audit method for the accounts under review. Disadvantages of a Negative ConfirmationA key concern with issuing negative confirmations is that the auditor has no idea if the confirmation was sent to the correct address, since no attempt is made to follow up with the recipient. This means that a problem might never be found, due to the nature of the confirmation. The Difference Between a Negative Confirmation and a Positive ConfirmationA positive confirmation is one in which the customer is required to send back a document, either confirming or disputing the account information sent to it by the auditor. A negative confirmation does not require as much follow-up work by auditors as a positive confirmation, but is also not considered to be as high-quality a source of audit evidence as the positive confirmation, since some customers may not be bothering to send back a confirmation document, even though they have detected a discrepancy. For this reason, most auditors prefer to use positive confirmations over negative confirmations, despite the additional cost. A negative or positive confirmation is not restricted for use with a client company's customers. They are also commonly used with suppliers to confirm small-dollar account balances. A negative confirmation is rarely used with a lender, since auditors want to be very sure about the ending debt balances reported by their clients. In this case, positive confirmations are nearly always used. As stated in 23.2.2, audit evidence is more reliable when it is obtained from independent sources outside the entity. ISA (UK) 505 provides guidance on using external confirmations
to provide sufficient appropriate audit evidence at assertion level. External confirmations are frequently used in connection with account balances and their components, such as debtors’ circularisations, which are discussed in detail in 23.8.2. However, they need not be limited to this and may be used to confirm the terms of agreements or transactions an entity has with third parties.
Examples of where external confirmations may be used are: To subscribe to this content, simply call 0800 231 5199 We can create a package that’s catered to your individual needs. Or book a demo to see this product in action. What Is a Negative Confirmation?Negative confirmation is a letter or document requesting that the recipient should only respond to the sender if there were an issue with the contents of the message or the recipient wanted to opt-out of the event that the letter had addressed. Negative confirmation letters can be used in many types of business situations and are often used in the financial services industry. The purpose of the communication is to reduce the number of incoming responses an organization receives in reply to a letter sent to its client base. In a negative confirmation or negative consent communication situation, the company or entity sending the message only receives responses from "no" votes, as opposed to responses from everybody regardless of their opinion. A negative confirmation can be contrasted with a positive confirmation. Key Takeaways
Understanding Negative ConfirmationsNegative confirmations are often used by auditors and involve a document sent to a sample of a company's customers, asking them to respond only if they find a discrepancy between their books and the account recorded on the financial statements of the company being audited. Negative confirmation is typically used when the accounting controls of a company have historically had very few errors and are thus considered to be strong. The company is asked to double-check the numbers and only confirm if there is a discrepancy. Sending out a negative confirmation as opposed to a positive confirmation, which requires a response, can save time that would be spent tracking replies and following up with unresponsive recipients. The negative confirmation is merely a way for an accountant to make sure both companies are reporting the same numbers. Examples of Negative ConfirmationsNegative confirmations have many applications that include both accountants and financial services companies. Employee Retirement PlansNegative confirmation letters are often sent out with 401(k) plans that have an auto-escalation feature. With auto-escalation, the percentage of an employee's paycheck contributed to each pay period is automatically increased every year. The intent of this automatically increasing savings rate is to help people save more money for retirement. A month or so before the escalation occurs, the recordkeeper sends out a negative confirmation or negative consent letter. The letter informs the participant that the contribution escalation will occur unless the participant contacts the 401(k) recordkeeper and opts out of the increase to maintain their current contribution rate. Accounting for RevenueA negative request can also be used to account for sales at a car manufacturer. According to the books, the manufacturer sold 200 cars to the dealership for a total of $6 million in revenue. The negative confirmation letter would state that if the $6 million figure was accurate, there's no need to reply. However, if the revenue amount were only $5 million, the manufacturer would need to notify the accountant of the discrepancy in the dealership's books. Negative confirmations are a professional way of saying "don't respond to me unless there is a problem." When should negative confirmations be used?Negative confirmation is typically used when the accounting controls of a company have historically had very few errors and are thus considered to be strong. The company is asked to double-check the numbers and only confirm if there is a discrepancy.
When auditors use negative confirmations?The three types of confirmation forms are positive confirmation, blank confirmation forms, and negative confirmation. Negative confirmation is best applied when the risk of material misstatement is low, meaning that inherent risk and control risk are relatively low.
Under what circumstances would positive confirmations be more appropriate than negative confirmations?Positive confirmations should be used when there are large individual accounts, expected errors or items in dispute, and/or when internal control is weak. Negative confirmations request a response only if the amount stated is incorrect.
What is the difference between positive and negative confirmations?While positive confirmation requires supporting information despite the accuracy of the original records, negative confirmation requires a response only if there is a discrepancy.
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