Why Your Auditor Writes to Your Bank Instead of Reading Your Bank Statement

Your First Audit Part 2 of 4

You hand over a bank statement showing $4.2 million. The auditor thanks you, files it, and then writes to your bank asking it to confirm the same number directly.

To a first-time client this looks like distrust, or duplication. It is neither. It is the difference between evidence you produced and evidence the auditor obtained.

Several of the requests in your first audit trace back to that distinction, and to two separate claims your accounts make about what you hold. Auditors call these claims assertions: that an asset exists, and that it is yours.

Existence: is it actually there?

The first assertion is that the asset exists.

For cash, receivables and borrowings, the auditor will often go to the party on the other side. When it does, ASA 505, the Australian auditing standard on external confirmations, requires the auditor to keep control of the confirmation request from start to finish. A document that passes through your hands, however honestly, is weaker evidence than one that does not.

If stock is not a significant part of your balance sheet, the next two paragraphs will not apply to you.

For inventory, existence has to be observed. Where inventory is material, ASA 501 requires the auditor to attend the physical count, evaluate your counting instructions, and test that your final inventory records reflect what was counted. That is why an auditor turns up at your stocktake rather than accepting the stock report.

If attendance is impracticable, the auditor performs alternative procedures. If those cannot produce sufficient evidence, the standard is blunt: the auditor modifies the opinion, which is what a lender or investor sees. Where material stock sits with a third party, the auditor asks that party to confirm quantities and condition, inspects the stock or uses other suitable procedures, or does both.

What happens if you say no

If management refuses to let a confirmation request be sent, ASA 505 does not treat that as a neutral scheduling matter. The auditor must inquire into the reasons and seek evidence that they are valid and reasonable, evaluate what the refusal means for the assessed risks of material misstatement including the risk of fraud, and perform alternative procedures.

If the auditor concludes the refusal was unreasonable, or alternative procedures cannot deliver reliable evidence, the matter goes to those charged with governance under ASA 260. That term means whoever is responsible for overseeing the strategic direction of the business, which in a smaller company can be the owner-manager rather than a separate board. The implications for the audit opinion are then considered under ASA 705.

A common reason given is a legal dispute or ongoing negotiation with the party being asked to confirm. The point is that the reason gets tested. A simple preference not to have the letter sent is not a reason, and it attracts more scrutiny than the confirmation would have.

Ownership: is it yours, and is it clear?

The second assertion is the one that catches people: an asset can plainly exist and still carry someone else’s claim.

Auditors call this rights and obligations. The Personal Property Securities Register (PPSR), overseen by a registrar within the Australian Financial Security Authority, is the national register where security interests over personal property are recorded.

A PPSR search by grantor, meaning a search against your company’s details such as its ACN rather than against individual assets, shows what has been secured over your assets. Equipment you believed you owned outright, or stock on your floor, may already be subject to a lender’s or supplier’s registered interest.

None of that shows up in a bank statement. All of it can affect what your accounts need to show.

Getting ahead of it

The requests supporting existence and ownership are predictable, which makes them the easiest to prepare for. All of these can be ready before fieldwork starts:

• Bank confirmation authorities signed early
• A receivables ledger that reconciles to the general ledger
• Counting instructions written and circulated before stocktake, not on the day
• Loan agreements, leases, security agreements and supplier terms in one folder
• Your own PPSR search by grantor, run before fieldwork

None of these depend on the year being closed, so the gaps surface early instead of in the final week.

Everything above can be checked against someone outside the business. Some balances cannot. Next in the series: the numbers nobody can confirm.