Bank confirmation letter is used by the bank to confirm the nature and balance of the cash at bank. Generally, bank confirmation is used by auditors to ensure the existence, completion, and accuracy of account balance recorded in the balance sheet.
At the audit time, auditors need to obtain sufficient and appropriate audit evidence on material account balances. The cash at the bank is one of the most sensitive and important account balances that need to be audited. Auditors perform the following auditor procedures to ascertain appropriateness of cash at the bank.
- Send bank confirmation to directly confirm the balance from bank.
- Review bank reconciliation statement.
- Review bank statement.
- Reconcile cash balance with the balance in bank statement/bank confirmation.
It’s important to note that balance in the bank statement should be equal to bank confirmation on the day of closing/year-end. There may be a difference between cash balance in the accounting books and bank confirmation. However, it needs to be traced in the process of bank reconciliation.
It’s equally important to note that auditors send Confirmation on their letterhead and state the purpose of Confirmation. However, it must be signed by signatories. Otherwise, the banks may not respond to the request.
Further, banks are requested to directly confirm auditors. For instance, banks may send Confirmation on auditor’s email or dispatch bank confirmation letter directly at the office address of auditors. This is because direct Confirmation helps auditors rely on accept letter act as evidence.
Further, the format of bank confirmation sent by auditors encourages banks to disclose details for the investment, loan, leasing arrangement, or any other services audit clients get.
Types of bank confirmation letter
There are two types of bank confirmation: positive Confirmation and negative Confirmation.
Positive Confirmation is when auditors require banks to respond to the query. The response is requested irrespective of whether the requested item is accurate or not. Normally, auditors send positive Confirmation.
Sometimes, auditors leave space in the format and request bank to write the balance at a specific date (year/period end).
Negative Confirmation is when auditors require banks to only respond if there are accuracy problems with the inquiry. Normally, this type of Confirmation is not used in the audit.
Conclusion on bank confirmation letter
Auditors obtain bank confirmation to ensure accuracy, completeness, and ownership of the account balance. Normally, auditors fill the format of the bank confirmation, send to the audit client for review and sign.
Once, Confirmation is signed, it’s sent to the bank. Mostly, Confirmation is positive and requires banks to respond even if the balance is accurate. The reply from the bank acts as sufficient and appropriate audit evidence and enables auditors to issue their reports.
It’s important to note that banks are requested to confirm the balance directly to the auditors. However, a bank needs approval from the signatories.
Frequently asked questions
Who sends bank confirmation?
Generally, auditors provide a format for the bank statement. The audit team writes the name, confirmation date, and bank name. This format is sent to the audit client for their review and sign. After the sign, it’s sent to the bank.
Is bank confirmation important?
Bank confirmation is important to verify ownership, accuracy, completeness, and existence of account balance. It acts as a control, and auditors feel confident because the balance is confirmed directly by bank. This is the same as third-party Confirmation.
What is a bank confirmation letter?
It’s a formal letter prepared by auditor, signed by audit client, and sent to the bank for balance confirmation.
Are bank confirmations required for an audit?
Yes, replied bank confirmation acts as sufficient and appropriate audit evidence. It enables auditors to make audit opinions and issue reports.
Is bank confirmation relevant as an audit procedure?
Yes, sending bank confirmation is considered to be an important audit procedure. It acts as reliable evidence because the bank directly confirms balance to the auditor.