Confirmations are a crucial audit procedure used to gather evidence about the existence and valuation of accounts, particularly accounts receivable. They involve direct communication with third parties (e.g., customers, banks) to verify specific information.

The primary purpose of confirmations is to obtain reliable evidence from independent external sources. This external evidence is generally considered more persuasive than internal evidence. Confirmations help auditors assess the risk of misstatement, especially for assertions like existence, rights and obligations, and valuation and allocation.

The choice between positive and negative confirmations depends on the assessed risk of material misstatement and the materiality of the accounts being confirmed. Positive confirmations are generally preferred when the risk is high or when dealing with material balances.

The process involves careful planning, designing appropriate requests, sending them to the correct third parties, and diligently following up on all responses and non-responses. Investigating any discrepancies is a critical step.

Effective confirmation requests should be clear, concise, and contain all necessary information. They should specify the exact amount or balance being confirmed, the date of the balance, and the name and address of the third party. For accounts receivable, it's often beneficial to include details of the invoices that make up the balance.

Non-responses to positive confirmations are a significant issue. Auditors must perform alternative procedures to obtain sufficient appropriate audit evidence. Exceptions (discrepancies) require thorough investigation to understand the cause and determine if a misstatement exists. This might involve reviewing supporting documentation or performing other audit tests.

While powerful, confirmations are not without limitations. They rely on the honesty and accuracy of the third party, and there's a risk of collusion or misinterpretation. The timing of the confirmation can also be a factor, as balances may change between the confirmation date and the financial statement date.

Confirmations are not limited to accounts receivable. They are also commonly used for accounts payable, bank balances, inventory held by third parties, and debt agreements. The principles remain the same: direct communication with an independent third party to verify specific information.