Open Banking in Audit: Consolidated vs account-based

Technology is evolving at pace in the world of business while Auditors and Accountants are progressing changes to their working practices to keep their work relevant.

Trial balance tie-in or lead schedule creation administration is automated. Audit Data Analytics replaces Audit sampling to tackle the highly transactional nature of modern, global business.

Will the next in line to be modernized by technology be bank confirmations?

Defining a bank confirmation

Falling within the broader classification or external confirmations Bank confirmations are defined by auditing standards as:

“Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.”

These Bank confirmations represent a positive confirmation, meaning a request for confirmation as to whether the third party agrees or disagrees with the information provided, or to provide the requested information.

 

Consolidated vs account-based

There are two types of bank confirmation:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated confirmations potentially provide auditors with additional audit evidence covering unknown financial facilities, therefore verifying the completeness of accounts and loans the entity holds.

Facilities undisclosed to the auditor, whether through fraud or error, would be included in a consolidated confirmation.

Account-based confirmations provide evidence over facilities the entity has disclosed to the auditor.

Facilities undisclosed, whether through fraud or error, would not be included in an accounts-based confirmation.

There are variations in the type of confirmation provided by banks from territory to territory.

Account-based confirmations are more common in the US while consolidated confirmations are more common in Europe.

 

Consolidated confirmations should be treated cautiously in terms of their completeness. Audit tests designed and intended to obtain a consolidated confirmation can commonly include qualifying statements from the confirming party. One example would be where a bank has not performed a detailed and comprehensive records search and that the confirmation, they provided does not relieve the auditor from their other duties. These statements impact the reliance auditors can put in such confirmations including all of the entity’s banking arrangements.

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