FRC Opens Consultation on Revisions to ISA (UK) 505 External Confirmations

The FRC has opened its consultation and published proposed revisions to ISA (UK) 505 External Confirmations. The consultation remains open for comments until 1 September 2023.

Despite there being no change to the international version of the standard, published by the IAASB, the FRC has proposed revisions which it considers reflect recent enforcement findings as well as ensuring that the standard reflects modern approaches to obtaining confirmations.

Unlike the extant version of ISA (UK) 505, the proposed version includes a number of ‘UK-pluses’ within its requirements.

In this article, we take a look at some of the key changes.

Prohibition on the use of negative confirmations

Perhaps the biggest change is with regard to negative confirmations - that is where the confirming party only responds if they disagree with the information provided in the request. Negative confirmations have long been considered weak audit evidence with the extant version of the standard already explicit in this regard.

In the light of recent enforcement findings, where the FRC has found inappropriate reliance upon negative confirmations, the FRC is now proposing to prohibit their use entirely.

Modernisation

The definition of ‘external confirmation’ has long included reference to ‘electronic or other medium’, although much of the extant standard is structured around sending and receiving physical letter.

The FRC is proposing to expand the definition of ‘external confirmation’ to clarify that an electronic medium could include auditors directly accessing information held by third parties through web portals, software interfaces or other digital means.

Investigating exceptions

The revisions include enhanced requirements regarding investigating exceptions, with specific consideration required as to whether exceptions are indicative of fraud or a deficiency in the entity’s system of internal control.

The auditor will also be required to specifically consider how additional procedures will allow them to obtain sufficient appropriate audit evidence.

Greater focus on assertions

The proposed revisions also include a greater focus on assertions with an enhanced requirement to ensure that requests are appropriately designed to provide evidence relevant to the assertions identified in accordance with ISA (UK) 330.

A reminder has also been added to the application material that when using electronic means to obtain confirmations, auditors should ensure that evidence is obtained for all relevant assertions – software interfaces may provide evidence over accuracy or valuation, but may not, for example, provide evidence over completeness, so additional procedures may need to be designed and performed.

What next?

The consultation will remain open until 1 September 2023. After this date the FRC will review the responses received and publish a final version of the standard.

The final version is likely to be effective for periods commencing on or after 15 December 2024.