Negative confirmation is an audit procedure that use to confirm the balance between the client’s records and third-party records.
Third-party here could be the client’s customers, suppliers, or banks. This confirmation requires a response only if the difference between both parties’ records is found.
If there is no difference found, responding to the auditor is not required. Negative confirmation is like other confirmation. It is performed by the auditor to confirm the existence and accuracy of balances or transactions of financial statements.
This confirmation is prepared by auditors and then send to clients for authorization. Once auditors get the authorization on the confirmation, then auditors should proceed with the confirmation to third parties like the client’s banks, customers, and suppliers. The confirmation also needs to be responded to by auditors directly.
Breakdown & Example:
Confirmation is a very popular procedure used by most auditors to confirm the existence and accuracy of accounting balance. However, the auditor cannot use this procedure alone to assess both assertions.
Negative confirmation is applicable for use in the situation where the client’s internal control system is strong and the client’s third party (customers & suppliers) are willing to respond. If the client’s internal control is not strong, the auditor should use positive confirmation or alternative procedures.
The best part of this procedure is that it is not required the auditor to follow up on the confirmation like positive confirmation.
This means that auditor saves much of their time. Yet, this kind of procedure does not provide strong evidence for auditors and it is normally not their choice.
Negative confirmation is used by auditors on three items in the balance sheet including inventories, fixed assets, and bank balance.
This confirmation is different from positive confirmation due to the positive confirmation required the response no matter the confirmed information agrees or does not agree.