ACCA Advanced Audit and Assurance (AAA) Practice Exam

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What type of confirmation does ISA 505 cover?

  1. Internal confirmations

  2. Third-party confirmations

  3. Oral confirmations

  4. Written confirmations from management

The correct answer is: Third-party confirmations

International Standard on Auditing (ISA) 505 specifically addresses the need for external confirmations obtained from third parties to corroborate information received from the entity being audited. This process is critical in audit practice as it enhances the reliability of evidence used to form an audit opinion. External confirmations are especially useful in verifying account balances, existence of transactions, and terms of agreements. By utilizing third-party confirmations, auditors can gather independent evidence that can provide assurance regarding the accuracy of assertions made by the management of the entity. This contrasts with internal confirmations, which are not deemed to be sufficiently reliable since they originate from within the organization being audited and may lack independence. The focus of ISA 505 on written confirmations is also crucial; obtaining confirmations in writing from independent parties is typically viewed as more persuasive and reliable compared to oral communications. Oral confirmations do not provide the same level of documentation and permanence that written confirmations do, making them less suitable for audit purposes. Lastly, while written confirmations from management may be necessary in certain contexts, ISA 505 specifically emphasizes the importance of obtaining confirmations from third parties to enhance the objectivity and credibility of the audit evidence gathered. Therefore, the emphasis on third-party confirmations aligns with the need for independent verification as endorsed by the auditing standard.