BUD 9.4 1. FOUR FACTORS A. THE RELIABILITY OF THE CONFIRMATION AND THE ALTERNATIVE PROCEDURES B. THE NATURE OF ANY EXCEPTIONS, INCLUDING IMPLICATIONS BOTH QUANTITATIVE AND QUALITATIVE C. THE AUDIT EVIDENCE PROVIDED BY OTHER PROCEDURES D. WHETHER ADDITIONAL AUDIT EVIDENCE IS NEEDED

CONFIRMATION IS THE PROCESS OF OBTAINING AND EVALUATING A DIRECT COMMUNICATION FROM A THIRD PARTY IN RESPONSE TO A REQUEST FOR INFORMATION ABOUT A PARTICULAR ITEM AFFECTING FINANCIAL STATEMENT ASSERTIONS.

THREE CHARACTERISTICS OF RELIABLE CONFIRMATION A. THE AUDITOR SHOULD INVESTIGATE RELEVANT INFORMATION PROVIDED ON NEGATIVE CONFIRMATIONS THAT HAVE BEEN RETURNED TO THE AUDITOR TO DETERMINE THE EFFECT B. THE AUDITOR SHOULD DIRECT THE CONFIRMATION REQUEST TO A THIRD PARTY BECAUSE YOU ARE KNOWLEDGEABLE ABOUT THE INFORMATION TO BE CONFIRMED C. THE USE OF BLANK CONFIRMATION REQUESTS MAY PROVIDE ASSURANCE ABOUT INFORMATION CONFIRMED

2. MAINTAINING CONTROL MEANS ESTABLISHING DIRECT COMMUNICATION BETWEEN THE INTENDED RECIPIENT AND THE AUDITOR TO MINIMIZE THE POSSIBILITY THAT THE RESULTS WILL BE BIASED BECAUSE OF MANIPULATION OF THE CONFIRMATION REQUESTS CORRESPONDENCES. (AU 330.28)
THIS IS NECESSARY TO ENSURE INDEPENDENT COMMUNICATION BETWEEN THE AUDITOR AND THE CUSTOMER.IF THE AUDITOR DOES NOT MAINTAIN CONTROL OVER THE CONFIRMATION PROCESS, CONTROL OVER THE PROCESS IS DEFICIENT IF THE CLIENT ACQUIRES THE CONFIRMATION, BECAUSE THE CLIENT CAN ALTER THE CONFIRMATION IN ORDER TO COMMIT FRAUD. INADEQUATE CONTROLS MAY BE SITUATIONS WHERE THE RESPONDENT REPLIES TO A CONFIRMATION REQUEST OTHER THAN IN A WRITTEN COMMUNICATION MAILED TO THE AUDITOR, THROUGH FAX OR EMAIL.

3. MORE EVIDENCE MAY BE REQUIRED TO SUPPORT THE CERTAINTY AND EFFECTIVENESS OF FAX OR EMAIL RESPONSES. TO CONFIRM THE SOURCE OF THE FAX OR EMAIL RESPONSE THE AUDITOR SHOULD CONTACT THE SENDER THROUGH PHONE CALL AND THE AUDITOR SHOULD REQUEST THAT THE SENDER MAIL THE ORIGINAL CONFIRMATION ADDRESSED TO THE CPA.THERE MAY BE SITUATIONS IN WHICH THE RESPONDENT, BECAUSE OF TIMELINESS OR OTHER CONSIDERATIONS, RESPONDS TO A CONFIRMATION REQUEST OTHER THAN IN A WRITTEN COMMUNICATION MAILED TO THE AUDITOR. WHEN SUCH RESPONSES ARE RECEIVED, ADDITIONAL EVIDENCE MAY BE REQUIRED TO SUPPORT THEIR VALIDITY. FOR EXAMPLE, FACSIMILE RESPONSES INVOLVE RISKS BECAUSE OF THE DIFFICULTY OF ASCERTAINING THE SOURCES OF THE RESPONSES. TO RESTRICT THE RISKS ASSOCIATED WITH FACSIMILE RESPONSES AND TREAT THE CONFIRMATIONS AS VALID AUDIT EVIDENCE, THE AUDITOR SHOULD CONSIDER TAKING CERTAIN PRECAUTIONS, SUCH AS VERIFYING THE SOURCE AND CONTENTS OF A FACSIMILE RESPONSE IN A TELEPHONE CALL TO THE PURPORTED SENDER. IN ADDITION, THE AUDITOR SHOULD CONSIDER REQUESTING THE PURPORTED SENDER TO MAIL THE ORIGINAL CONFIRMATION DIRECTLY TO THE AUDITOR. ORAL CONFIRMATIONS SHOULD BE DOCUMENTED IN THE WORKING PAPERS. IF THE INFORMATION IN THE ORAL CONFIRMATIONS IS SIGNIFICANT, THE AUDITOR SHOULD REQUEST THE PARTIES INVOLVED SUBMITTING WRITTEN CONFIRMATION OF THE SPECIFIC INFORMATION DIRECTLY TO THE AUDITOR. 4. A POSITIVE CONFIRMATION REQUESTS THE RESPONDENT TO CONFIRM WHETHER THE BALANCE AS STATED ON THE CONFIRMATION REQUEST IS CORRECT OR INCORRECT. A NEGATIVE CONFIRMATION REQUESTS RESPONSE ONLY WHEN THE RECIPIENT DISAGREES WITH THE STATED AMOUNT.

A POSITIVE CONFIRMATION IS MORE RELIABLE EVIDENCE BECAUSE THE AUDITOR CAN PERFORM FOLLOW-UP PROCEDURES IF A RESPONSE IS NOT RECEIVED FROM THE RECIPIENT. POSITIVE CONFIRMATION IS THE REQUEST ADDRESSED TO THIRD PARTIES ASKING FOR A REPLY.SOMETIMES, IT IS A BLANK FORM AND THIRD PARTIES HAVE TO FILL IN THE BALANCE. POSITIVE FORM PROVIDES MORE ASSURANCE AS THE PERSON RECEIVED HAS TO FILL OUT THE NUMBER IN THE BLANK FORM OR IF THOSE FORMS DID NOT COME BACK, THE AUDITORS WILL BE ALERTED TO PERFORM FURTHER PROCEDURES. BUT THE RETURN OF THE FORM SOMETIMES DOES NOT TELL THE TRUTH. THE RECEIVER MAY JUST SIGN AND SEND IT BACK WITHOUT MATCHING THE BALANCE WITH THEIR BOOKS.

NEGATIVE CONFIRMATION IS THE REQUESTS ASKING THIRD PARTIES TO VERIFY THE BALANCE SHOWN IN THE REQUEST ONLY IF THE AMOUNT DOESN'T MATCH. WITH A NEGATIVE CONFIRMATION, FAILURE TO A REPLY CAN BE REGARDED AS A CORRECT RESPONSE EVEN THOUGH THE RECIPIENT MAY HAVE IGNORED THE CONFIRMATION REQUEST. IT COULD LEAD TO A MISSTATEMENT IF THE RECIPIENT DID NOT WANT TO VERIFY THE BALANCE OR IF THE MAIL WAS LOST. NEGATIVE CONFIRMATIONS ARE LESS EXPENSIVE TO SEND THAN POSITIVE CONFIRMATIONS BECAUSE MORE CAN BE DISTRIBUTED AT THE SAME TOTAL COST. NEGATIVE CONFIRMATIONS COST LESS BECAUSE THERE ARE NO SECOND REQUESTS AND NO FOLLOW-UP OF NON-RESPONSES. 5. PARMALAT, ITALY’S LARGEST FOOD COMPANY INVOLVED THE DISAPPEARANCE OF MORE THAN $10 BILLION DOLLARS IN ASSETS. PARMALAT HAD BEEN USING ITS ASSETS TO OFFSET MORE THAN A DECADE'S WORTH OF LIABILITIES THROUGH OFF SHORING AND FOREIGN FINANCE COMPANIES. THE PROBLEM WAS THAT THESE ASSETS DID NOT EXIST. A DOCUMENT FROM THE BANK OF AMERICA THAT WAS SUPPOSED TO CONFIRM THE PRESENCE OF AN ACCOUNT CONTAINING MORE THAN $4 BILLION WAS DETERMINED TO BE A FORGERY. A PARMALAT REPRESENTATIVE CLAIMED TO HAVE TRACED $7.7 BILLION TO ANOTHER BANK OF AMERICA ACCOUNT, BUT A RESULTING SEARCH BY THE BANK'S REPRESENTATIVES DETERMINED THAT THIS ACCOUNT DID NOT EXIST. THE SCANDAL WAS DISCOVERED BECAUSE ITALIAN LAW MANDATES THAT COMPANIES MUST CHANGE AUDIT FIRMS EVERY NINE YEARS. DELOITTE & TOUCHE, WHICH REPLACED AUDITOR GRANT THORNTON IN 1999, WAS THE FIRST TO EXAMINE THE NONEXISTENT ACCOUNTS. THIS CALLED INTO QUESTION WHAT GRANT THORNTON'S ROLE WAS IN THE FRAUD, PARTICULARLY SINCE PARMALAT CONTINUED TO RETAIN THE FIRM AS ITS AUDITOR FOR ITS CAYMAN ISLANDS SUBSIDIARY, BONLAT, WHICH WAS NOT SUBJECT TO ITALIAN LAW AND WAS WHERE THE MISSING ASSETS WERE SUPPOSED TO HAVE BEEN LOCATED. ALTHOUGH GRANT THORNTON CLAIMS TO HAVE BEEN A VICTIM OF THE FRAUD AS WELL, TWO OF ITS EXECUTIVES ARE AMONG THE 11 PEOPLE WHO HAVE BEEN ARRESTED IN CONNECTION WITH THE CASE.