What is Positive Confirmation in an Audit?

Definition:

Positive confirmation is an auditing term. As recognized by the term, it is associated with the confirmation of the customer.

Positive confirmation is understood in a way that it is a possible auditing inquiry that asks customers for their response. In this inquiry, a customer responds and confirms the accuracy and authenticity of the item.

It is not just a confirmation by words but a statement of proof. It confirms with proof that the provided information about an item was correct. Or if the information was wrong, then it is corrected and represented with proof.

In this article, we’ve discussed some of the core facts and information about positive confirmation according to GAAS (Generally Accepted Auditing Standards).

What is positive confirmation?

As per GAAS, positive confirmation is an evaluation request that requires the client to react, affirming the precision of an item.

To confirm the measures of liabilities, financial balances, accounts receivables, ventures and payables, positive confirmations are used.

Positive confirmation requires evidence of precision by confirming that the first data was right or by giving the right data afterward.

Positive confirmation from another point of view:

Positive confirmation is also referred to as a request made by an auditor to an outsider that requires a reaction or response.

The request is concerning whether the outsider’s records match those that the auditor is inspecting.

Regardless of whether there is a match, without any exemptions, the auditor demands a response from the third party or the outsider. In positive confirmation, auditors generally review or audit the receivables, payables, or debt arrangements.

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There’s also another kind of confirmation that goes against the positive confirmation. It is the opposite of positive confirmation. It is known as negative confirmation.

A positive confirmation is considered to address more excellent proof than a negative confirmation since the auditor gets unequivocal proof from the third party.

What are Positive Confirmations Used for?

Positive confirmation is essential for the affirmation techniques that auditors use to validate core pieces of the available data. The responsibility of the beneficiary of the letter is to answer to prove the authenticity of the data and send it back to the auditor.

These are some of the information examples that auditors usually review:

  1. The sums and portrayals of different sorts of liabilities
  1. Financial balance data including balances
  1. Sum of stocks and their different types
  1. Investments and their available information
  1. Sales invoices and their data to guarantee deals were made
  1. Information of the shipping invoices to guarantee items were sent to their locations

How do Auditors Conduct Positive Confirmation Analysis?

Auditors likewise utilize positive confirmation letters to check creditor liabilities and records receivable of organizations. Records payables are transient obligations. These obligations are owed by organizations to their providers.

Records receivables address cash owed by an organization’s clients for the offer of merchandise. Receivables and payables regularly have instalment terms of 30, 60, or 90 days—which means an instalment should be made inside that period.

An auditor can check the precision of the records receivable by deciding whether the records precisely mirror the exchanges that have happened between the organization and its clients.

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Reaching clients straightforwardly also helps them with confirming that recorded records exist, that adjustments displayed as owed are right, and that installments set apart as received are valid.

Records receivables are transient resources and can be utilized by organizations as insurance to get credits or financing from banks.

Subsequently, it’s significant that the receivables are reviewed to affirm that the deals were made just as affirm that the assets from the deals are being gathered on schedule.

If an organization wishes to review its payable records, it should audit any friendly assets related to obligation commitments or bank instalments.

The interaction might require an audit of billings and a compromise of those sums with instalments that were recorded as being made.

Furthermore, the business might decide to coordinate the previously mentioned finances to deal withdrawals from instalment records to affirm accuracy.

Numerous fintech new businesses have arisen to settle the digitization of this cycle. Taulia, Tipalti, C2F0, and Liquidx are large names that open entryways of improvement just as difficulties for evaluating positive affirmation matters.

Example of a Positive Confirmation Analysis:

If an individual is chosen for a review by the Internal Revenue Service (IRS), the citizen should deliver records to ensure the accuracy of the data recorded on tax returns.

The auditing review may incorporate a positive confirmation demand for all kinds of incomes/revenue, and evidence of asserted gains or losses.

Regardless of whether the data needed for the review matches what was accounted for, all proof should be submitted to fulfill the audit necessities.

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This is a simple example that explains what essentials does an auditor requires to complete his necessary audit. It further explains the importance of all proofs and previous records. Thus, if you’ve ever claimed a profit or loss on taxes, you should keep their evidence in a safe place.

Conclusion:

Positive confirmation is an auditing practice that’s conducted by auditors to validate the available pieces of information.

It is one of the most important principles that’s carried out in audits to prove the accuracy and authenticity of the information. Positive analysis can be done on several information pieces such as liabilities data, invoices, and stock reports.

Conducting a positive confirmation analysis can be helpful a lot of times. It helps to ensure that everything is authentic and as per the Generally Accepted Auditing Standards. Without performing positive analysis, one cannot identify whether the available data is correct or not.

We’ve highlighted all the core facts about the positive confirmation to help you get a better understanding of this auditing principle and practice.