The Public Company Accounting Oversight Board (PCAOB) has proposed an update to its audit confirmation standard for the first time in decades.

The existing AICPA standard dates to 1992 and was copied by the board when it was created in 2003. The proposed rule takes technological changes into account and would apply to all methods of confirmation.

The current standard “was written at a time when paper-based confirmation requests and responses were the prevailing means of communication,” the proposal says. “Since then, e-mailed confirmation requests and responses, and the use of technology-enabled confirmation tools, including the use of intermediaries to facilitate the confirmation process, have become commonplace.”

“To modernize the PCAOB’s confirmation standard, the proposed standard includes principles-based requirements that would apply to all methods of confirmation, including paper-based and electronic communications,” the board stated. “The proposal, if adopted, would better integrate the PCAOB’s confirmation standard with its risk assessment standards.”

The updates states, "Existing AS 2310 indicates that confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions." It explains that the "new proposed standard and amendments, which would apply to all audits conducted under PCAOB standards, are intended to enhance the Board’s standard on the use of confirmation by describing principles-based requirements that apply to all methods of confirmation, including paper-based and electronic means of communications."

The PCAOB highlighted four key proposals that would:

• Include a new requirement regarding confirming cash held by third parties, and carry forward the existing requirement regarding confirming accounts receivable;

• State that the use of negative confirmation requests alone does not provide sufficient appropriate audit evidence (and include examples of situations where the auditor may use negative confirmation requests to supplement other substantive audit procedures);

• Identify situations in which alternative audit procedures should be performed by the auditor (and include examples of such alternative procedures that may provide relevant and reliable audit evidence); and

• Clarify that there are certain activities in the confirmation process for which the auditor may not use internal auditors to provide direct assistance. 

“When properly designed and executed, confirmation can be a critical part of the evidence that auditors obtain to support their opinion regarding a company’s financial statements,” the PCAOB stated. “A properly designed and executed confirmation can also be an important response for auditors to address fraud risks.”

“We believe that the new proposed standard would contribute to enhancing audit quality by clarifying and strengthening the requirements for the auditor’s use of confirmation,” the proposal read.

“Confirmations are critical audit procedures to obtain audit evidence from third parties concerning the existence of cash and other significant accounts as well as to detect fraud,”  PCAOB board member Christina Ho, chair of the PCAOB's new Technology Innovation Alliance Working Group, told Accounting Today. “I am pleased that this proposal addresses some of the technological advances in auditing. As noted in our strategic plan, the PCAOB must continue to anticipate and respond to emerging trends impacting audit quality.”