What it means
Auditors cannot take a company's word for what customers owe it or what the bank holds. They ask the outsiders directly, and the confirmation request is the tool for doing it.
A positive confirmation demands an answer either way. The recipient, say a customer of the audited company, must write back stating whether the balance shown agrees with their records, and silence is not treated as agreement.
The negative form works oppositely: the recipient replies only if they disagree. Negative requests are cheaper but weaker, because a letter ignored and a letter agreed both look like silence.
The PCAOB's auditing standard AS 2310, The Auditor's Use of Confirmation, governs the process for US public company audits and makes clear that negative confirmations alone rarely provide sufficient evidence. Within the positive form there are two styles.
Some requests state the balance and ask agree or disagree; blank forms ask the recipient to supply the figure themselves, which is stronger evidence but draws lower response rates. Non-responses are work, not answers: when positive requests go unanswered, the auditor must perform alternative procedures, such as checking later cash receipts or underlying shipping documents.
Confirmations are the standard proof for cash, receivables, and key contract terms, because they put the assertion in front of someone with no reason to play along with management's story. For a non-finance reader, a positive confirmation is the difference between assuming nobody objected and knowing somebody agreed.
Audits pay for the second, because the first is where fraud hides. The process is tightly controlled: auditors choose who receives requests, verify addresses independently, and mail the letters themselves, because a confirmation routed through the client can be intercepted or invented.
Electronic confirmation platforms have modernised the mechanics without changing the logic, since a reply still has to come from the third party, not from the client's spreadsheet. Fraud cases in the audit literature repeatedly feature fake confirmations, and the pattern is consistent: when management controls the evidence channel, the evidence is worthless.
In practice
Real-world examples.
Example
An auditor sends positive confirmations on all receivable balances over $100,000, requiring each customer to confirm or correct the amount. The largest balances carry the most risk of misstatement, so they are covered in full rather than sampled. Replies come back directly to the audit firm, not to the client.
Example
A bank confirmation letter verifies the company's year-end cash balances and loan terms directly with its bankers. The auditor compares the reply with the cash ledger and the debt disclosures in the financial statements. Any difference is investigated before the audit opinion is signed.
Example
When a major customer fails to reply, the auditor verifies the balance by matching it to subsequent cash receipts and signed delivery documents. Subsequent receipts are powerful proof; money that arrived after year end is hard to fake. The file records why the alternative evidence is considered as reliable as a reply would have been.
Formula
Calculation
There is no formula. The evidence logic: positive confirmations produce direct third-party responses for sampled balances, non-responses require alternative procedures, and a blank-form request trades lower response rates for higher reliability per reply.
The arithmetic that auditors track is coverage and response rate. If receivables total $5,000,000 and the confirmed sample totals $3,000,000, coverage is $3,000,000 / $5,000,000 = 60%. If 36 of 40 requests are answered, the response rate is 36 / 40 = 90%, and the remaining 4 non-responses, 10% of the requests, each need alternative procedures.Case study
Seen in the real world.
This case study is fictional and illustrative. Auditors of a made-up distributor select forty customer balances totalling 60% of receivables and send positive confirmation requests. Thirty-six reply; thirty agree and six report discrepancies, mostly timing differences on goods in transit, which the team reconciles to shipping records. Four customers never respond despite two follow-ups. For those, the auditors perform alternative procedures: tracing the balances to signed delivery notes and to cash received after year end.
One of the four shows neither delivery evidence nor payment, and digging reveals the sale was booked on the last day of the year with terms that allowed return. The revenue is reversed, the receivable written back, and the file memo notes that only the reply-required design of positive confirmations forced the issue into the open. Suppose the reversed sale was $240,000 against receivables of $5,000,000, under 5% of the ledger. The amount was small, but the pattern of last-day entries led the auditors to widen their testing of other late-December sales.
Watch out
Common mistakes.
- Treating a non-response to a positive confirmation as agreement; it is an unanswered question that demands alternative procedures.
- Relying on negative confirmations for material, high-risk balances; silence proves nothing and the standard treats them as weak evidence.
- Letting the client control the mailing; auditors must control the process themselves, or the replies may never have reached real third parties.
Questions
People also ask.
What is a positive confirmation in auditing?
A request asking a third party to respond whether the stated information is correct or not, with non-replies followed up or replaced by alternative audit procedures. It is the strongest of the written confirmation forms.
How does it differ from a negative confirmation?
A negative confirmation asks for a reply only on disagreement; because silence is ambiguous, it provides much weaker evidence than the positive form.
What is a blank confirmation form?
A positive request that does not state the balance and asks the recipient to supply it, yielding stronger evidence but typically lower response rates.
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