Negative confirmation is a method used by auditors to verify financial information provided by a client. It involves requesting the client to respond only if the information presented is incorrect. This approach differs from positive confirmation, where the client is asked to confirm the accuracy of the information. Negative confirmation is often employed when the auditor believes the risk of material misstatement is low, and the number of account balances is large.
How Negative Confirmation Works
When conducting an audit, auditors may use negative confirmation to obtain evidence regarding account balances or transactions. They send letters or emails to the client’s customers, creditors, or other relevant parties, asking them to respond only if they disagree with the information provided. For example, if the auditor is verifying accounts receivable, they may send a negative confirmation request to selected customers, asking them to notify the auditor if the stated account balance is incorrect.
Advantages
Negative confirmation can be a cost-effective and efficient way to gather evidence during an audit, especially when dealing with a large number of transactions or account balances. It requires less effort from both the auditor and the respondents, as they only need to respond if there is a discrepancy. Additionally, negative confirmation can help auditors identify errors or irregularities in financial records by highlighting inconsistencies reported by respondents.
Disadvantages
Despite its benefits, negative confirmation has some limitations. For instance, there is a risk that respondents may overlook or ignore the confirmation requests, leading to incomplete or unreliable evidence. This method may also be less effective in detecting fraud or intentional misstatements, as perpetrators may choose not to respond to the requests. Furthermore, negative confirmation may not be suitable for all types of transactions or balances, particularly those that are complex or high-risk.
