Negative confirmation is an audit procedure that we perform to confirm the client’s balances. Like positive confirmation, we perform negative confirmation by using formal letters or documents to request the response from the recipients.
However, in this type of confirmation, we require the recipients to respond only if they don’t agree with the indicated balances stated in the confirmation letter.
The recipients, in this case, may include customers, suppliers, and banks. However, we usually only use negative confirmation to test the balances of accounts receivable or accounts payable. This is due to the risk of material misstatement for these two accounts are sometimes low.
For the bank accounts, we usually use only positive confirmation as the risk of cash and bank is usually high, even their balances are low sometimes.
Negative Confirmation vs Positive Confirmation
The difference between negative confirmation and positive confirmation are included in the table below:
|Response is not required if the recipient agrees with the balances
|Response is always required regardless the recipient agrees or not with the balances
|No follow-up procedures are required
|Follow-up procedures are required if the recipient does not reply
|Less expensive for the cost of confirmation
|More expensive as second confirmation or follow-up procedures may be required
|Save time in the audit process
|Spend more time for those non-response confirmation letters
Negative confirmation looks much better as it does not require us to follow up when there is no response. Hence, we can save both time and effort in the audit.
However, that doesn’t mean we should always use this type of confirmation. This is due to there are strict criteria we should follow and the quality of the confirmation is sure to be lower than the positive one.
So, we should only use negative confirmation when:
- There are a large number of small balances, e.g. there are 100 customers in which each customer only owes a small amount to the client.
- The client has strong internal control in place.
- We assess that the risk of material misstatement for the balances is low.
- We believe that the recipients, e.g. customers or suppliers, are like to give proper attention to the confirmation requests.