Negative confirmation definition
/What is a Negative Confirmation?
A negative confirmation is a document issued by an auditor to the customers of a client company. The letter asks the customers to respond to the auditor only if they find a discrepancy between their records and the information about the client company's financial records that are supplied by the auditor. It is sometimes used when an auditor is confirming the accounts receivable or accounts payable of a client.
Example of a Negative Confirmation
For example, a confirmation letter tells a customer that the client company's records at year-end show an ending accounts receivable balance for that customer of $500,000. If the customer agrees with this number, it does not have to contact the auditor to confirm the supplied information. The auditor will then assume that the customer agrees with the information presented to it in the confirmation. In fact, the customer finds that its records show an ending receivable balance of $490,000, and elects to send this information to the auditor. The auditor then follows up in regard to this disparity.
When to Use a Negative Confirmation
A negative confirmation is designed for use in situations where a client company's internal controls are already considered to be quite strong, so that the confirmation process is used as a secondary audit method for the accounts under review. When a client’s system of internal controls is considered to be relatively weak, it is more common for the auditor to issue positive confirmations, where the auditor asks recipients to respond to the mailed request.
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Disadvantages of a Negative Confirmation
A key concern with issuing negative confirmations is that the auditor has no idea if the confirmation was sent to the correct address, since no attempt is made to follow up with the recipient. This means that a problem might never be found, due to the nature of the confirmation.
The Difference Between a Negative Confirmation and a Positive Confirmation
A positive confirmation is one in which the customer is required to send back a document, either confirming or disputing the account information sent to it by the auditor. A negative confirmation does not require as much follow-up work by auditors as a positive confirmation, but is also not considered to be as high-quality a source of audit evidence as the positive confirmation, since some customers may not be bothering to send back a confirmation document, even though they have detected a discrepancy. For this reason, most auditors prefer to use positive confirmations over negative confirmations, despite the additional cost.
A negative or positive confirmation is not restricted for use with a client company's customers. They are also commonly used with suppliers to confirm small-dollar account balances. A negative confirmation is rarely used with a lender, since auditors want to be very sure about the ending debt balances reported by their clients. In this case, positive confirmations are nearly always used.