Audit Confirmation

Current Audit Procedure Auditing is an objective examination and evaluation of a company's internal controls and effectiveness. Maintaining this is vital to make sure that the records are a fair and accurate representation of the transactions they claim to represent. This will help companies achieve its business objectives, obtain reliable financial reporting on its operations, prevent fraud and misappropriation, and minimising its cost of capital. Auditors generally use confirmations as the substantive procedure during an audit. This process involves 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.

The process includes:

  • Selecting items for which confirmations are to be requested

  • Designing the confirmation request

  • Communicating the confirmation request to the appropriate third party

  • Obtaining the response from the third party

  • Evaluating the information, or lack thereof, provided by the third party about the audit objectives, including the reliability of that information

From an auditor’s point of view, assertions about classes of transactions and events and related disclosures for the period under audit must meet the following:

Occurrence: the transactions and events that have been recorded or disclosed, have occurred, and such transactions and events pertain to the entity.

Completeness: all transactions and events that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included.

Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described.

Cut–off: transactions and events have been recorded in the correct accounting period.

Classification: transactions and events have been recorded in the proper accounts.

Presentation: transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

For assertions about account balances and related disclosures at the period end, the following must be met

Existence: assets, liabilities and equity interests exist.

Rights and obligations: the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Completeness: all assets, liabilities and equity interests that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included.

Accuracy, valuation and allocation: assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded and related disclosures have been appropriately measured and described.

Classification: assets, liabilities and equity interests have been recorded in the proper accounts.

Presentation: assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

On average the turnaround takes four to six weeks, and as a consequence of this long and manual process, only 10-20% of transactions are tested with a 43% failure rate, which means fraud can still go largely undetected.

Current Audit Confirmation Process

Moreover, if you magnify the transactions by hundreds and thousands per day, imagine the myriad of complexity a typical business has to deal with. The complexity is demonstrated in the following diagram where a simple sales transaction translates to over 40 transactions internally within departments.

Transaction Process Internally Within Departments

The current audit confirmation process is slow and resource intensive, only a small sample of transactions are audited, there is a high degree of errors and overall still prone to fraud. With Luca+ capturing every transaction and writing it onto the Ledgerium Blockchain and the use of smart contracts to acknowledge and confirm that the transaction has occurred, significant time and cost savings can be achieved.

Benefits of Audit Confirmation Using Luca+ and Ledgerium Blockchain