What does an exception refer to in audit confirmations?

In the context of audit confirmations, an exception specifically refers to a response from a confirmed party that highlights discrepancies between the information maintained in the entity's records and the external information provided by that party. This situation is critical for auditors as it signals potential issues, such as errors or fraud, that require further investigation.

Understanding that an exception demonstrates a misalignment between internal and external records helps auditors evaluate the reliability of the information received and determines whether additional corroborative evidence or follow-up procedures are necessary. The presence of discrepancies can raise significant risk factors that the auditor must consider when forming conclusions about the financial statements and the effectiveness of internal controls.