Question

Bank confirmations are critical to the cash audit. What information does the auditor obtain by sending bank confirmations? Explain the different types of bank confirmations and what assertions each type addresses. How do you determine which is the best bank confirmation type to use

Answer 1

A bank confirmation letter is a confirmation from a bank or financial institution to confirm the existence of a loan that has been provided to the borrower. The letter is an evidence for the fact that the borrower has taken a loan and the primary purpose of confirmation is to verify the actual cash balance as per bank records.

Different types of bank confirmations are negative and positive confirmations. A positive confirmation requests bank to reply whether the account balance is correct or not. A negative confirmation requires bank to reply only when the account balance is incorrect.
A positive confirmation from the bank confirms the existence assertion in the financial statements. A negative confirmation from the bank confirms the accuracy assertion by verifying the balance owed.

Positive confirmation is the best bank confirmation as in this case bank responds whether the account balance is correct or not and provides evidence for audit but in negative confirmation, unreturned confirmation rarely provides evidence for audit.