PCAOB’s New Standard Enhances Auditors’ Use of Confirmations

The Public Company Accounting Oversight Board (PCAOB) recently implemented a new standard that aims to strengthen confirmation requirements and provide additional protection for investors.

Historically, confirmations have been known as information obtained by the auditor directly from knowledgeable external sources, which includes the use of electronic or third-party intermediaries. Auditors will typically use confirmations in situations where reliable information can be obtained directly from a third party that transacts with the company. This is a crucial tool used in the audit process, as it ensures audit quality and helps auditors obtain evidence relating to a company’s financial statements.

As described in Auditing Standard (AS) 2310, The Auditor’s Use of Confirmation, the process involves selecting one or more items to be confirmed and sending a request to a confirming party (e.g., a financial institution). Auditors then evaluate the information received and can make informed decisions relating to one or more financial statement assertions. The new standard replaces AS 2310, The Confirmation Process, which took a more generalized approach at audit confirmations and failed to account for the variety of unique scenarios that can occur during the audit process.

The Auditor’s Use of Confirmation includes the following key points:

• A new requirement regarding confirmations of cash and cash equivalents held by third parties, or otherwise obtaining relevant and reliable audit evidence by directly accessing information maintained by a knowledgeable external source.
• Carries forward the existing requirements for confirming accounts receivable while addressing the need to account for scenarios where it would not be feasible for the auditor to perform confirmation procedures or obtain relevant and reliable audit evidence for accounts receivable by directly accessing information maintained by a knowledgeable external source.
• States that the use of negative confirmation requests alone does not provide sufficient or appropriate audit evidence.
• Emphasizes the auditor’s responsibility to maintain control over the confirmation process and provides that the auditor is responsible for selecting the items to be confirmed, sending confirmation requests and receiving confirmation responses.
• Identifies situations in which alternative procedures should be performed by the auditor.

The new standard and related amendments will apply to all audits conducted under PCAOB standards and will take effect for audits of financial statements for fiscal years ending on or after June 15, 2025, subject to approval by the Securities and Exchange Commission.

This modernized standard amplifies the auditor’s responsibilities for obtaining relevant and reliable audit evidence through the confirmation process. It also takes a more principles-based approach to requirements for the confirmation process that’s designed to apply to all methods of confirmation. Additionally, the standard combines the requirements for auditors’ use of confirmations with the PCAOB’s risk assessment standards, which is accomplished by including risk-based considerations in the confirmation process and emphasizing the auditor’s responsibility to obtain reliable audit evidence. With the updated standard in place, investors can have additional assurance that they have the necessary information to make appropriate financial decisions for years to come. 

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