Audit Basics: Confirmation Letters

During the course of an audit, you may hear your auditors refer to something called a “confirmation letter.” This is a letter that your auditor will send out to third parties, such as banks or suppliers, asking them to confirm certain financial information. Confirmation letters are important because they provide an independent verification of your organization’s finances.

If your accounts receivable shows that you owe money to a particular vendor, your auditor might send that vendor a confirmation letter asking them if that amount is accurate. Your auditor might also send letters to other parties asking them to verify cash, inventory, notes payable, legal matters, contracts, or any unusual transactions. Confirmation letters may be sent electronically or through the mail (often with a pre-addressed return envelope included). Postage charges for the confirmation letters will usually be billed back to your organization.

The confirmation process involves several steps:

1. The auditor selects the items for which they will request confirmation. If your organization has a valid reason to object to any of these selections, discuss this with your auditor before the confirmation process continues.
2. The auditor designs the confirmation requests and tailors them to specific audit objectives. The auditor will consider the type of request, prior experience, the nature of the information being confirmed, and the intended respondent of the confirmation letter.
3. The auditor communicates the confirmation request to the third party by sending out the audit confirmation letter. There are two types of confirmation letters: positive requests (asking the third party if they agree or disagree with the stated information, or to fill in the blanks) and negative requests (where the third party only has to reply if they disagree with the stated information).
4. The auditor obtains the response (if any) from the third party. If the third party fails to respond or responds with conflicting information, the auditor may ask your staff for clarification or pursue alternative confirmation procedures.
5. The auditor evaluates the information they received, including the reliability of that information and how it relates to the organization’s finances.

In general, audit evidence is most reliable when it is obtained from independent parties outside of the organization. That’s why audit confirmation letters are such a critical part of the audit process. If you have any questions or concerns regarding the audit confirmations, don’t hesitate to reach out to your audit firm.