Positive confirmation is a method of auditing account balances and transactions where the auditor sends a written request to a third party (often a customer or vendor) asking them to confirm or deny specific information.
For example, in an audit of accounts receivable, the auditor might send a positive confirmation to a customer asking them to confirm the balance they owe to the company being audited. The confirmation letter typically asks the recipient to respond directly to the auditor, regardless of whether the balance is correct or not.
Positive confirmations provide strong, reliable audit evidence because they require active confirmation from the third party. However, they also carry the risk of non-response, and they can be more time-consuming and costly compared to other types of audit procedures, such as negative confirmations (which require a response only in the case of discrepancies).
It’s worth noting that, while positive confirmations provide more reliable evidence, they are not foolproof. They can still be subject to fraud or error, for instance, if the recipient does not pay careful attention to the details in the confirmation request.
Example of Positive Confirmation
Let’s consider an example involving the audit of a company, called Company X.
The auditors of Company X are examining its accounts receivable, i.e., the money owed to Company X by its customers. As part of their audit, they decide to use positive confirmation.
The auditors select a sample of customers from Company X’s accounts receivable ledger. They then send a letter to these customers asking them to confirm the amount that Company X’s records show they owe. The letter includes a request for the customers to respond directly to the auditors, regardless of whether they agree with the stated amount or not.
For example, one letter sent to a customer might say:
“According to our client, Company X, your outstanding balance as of December 31, 2023, was $5,000. Please confirm directly to us whether this amount is in agreement with your records. If the amount does not agree with your records, please provide the correct balance.”
In this example, the auditor is using a positive confirmation because they are asking the customer to respond whether they agree with the balance or not. If the customer confirms the balance, the auditor has additional evidence that the accounts receivable balance in Company X’s financial statements is accurate. If the customer disputes the balance, the auditor will have to investigate further to understand and resolve the discrepancy.