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Jan 1991

The new confirmation form for financial institutions. (Auditing)

by Sauter, Douglas P.

    Abstract- One of the most common procedures in bank audits is the confirmation of the institutions' cash balances. The form for confirming cash balances and soliciting other financial information from banks has been revised. The old form had last been revised in 1966, before the advent of the new services offered by financial institutions, including foreign currency transactions, and loan- and interest-rate swaps. The major change in the form is the elimination of items covering arrangements and transactions other than loan and deposit balances. The new standard form should be used by auditors for engagements on or after 31 Mar 91.

The revised standard form, jointly approved by the American Bankers Association (ABA), the AICPA, and the Bank Administration Institute (BAI), is part of a revised approach to the confirmation of account balances and other information with financial institutions. The AICPA's Auditing Standards Division has issued a Notice to Practitioners explaining the changes to the standard form and confirmation process. The Notice, which appeared in the October 1990 The CPA Letter, will accompany all new orders of the standard form from the AICPA Order Department.

Why Change the Existing Form?

In 1966, the AICPA revised the standard form to provide for the inclusion of information on security agreements under the Uniform Commercial Code. Since then, the deregulation of and increased competition among financial institutions has led to the offering of a wide array of services by financial institutions. These services include foreign currency transactions, interest rate and loan swaps, and other innovative financial instruments and transactions. Some of these services, such as off-balance sheet financing arrangements, have made the auditor's job more difficult. Auditors seeking confirmation of certain of these matters with financial institutions have found that the standard form was not designed to address many types of arrangements or transactions. The revisions are designed to improve the quality of audit evidence obtained from financial institutions and the efficiency with which that evidence is obtained.

Another reason for revising the standard form relates to the process by which financial institutions complete the form. Typically, financial institution employees that complete the form use information systems that only indicate the dollar amount of loan and deposit balances. These systems may not generate information about other arrangements that the customer may have with the financial institution. Also, the employee completing the form is usually unaware of other financial services that the financial institution provides to the customer. Thus, financial institutions have found that completion of the old standard form, especially questions 3 through 5, has become difficult.

What are the Changes?

The biggest change to the standard confirmation form has been to eliminate the items addressing transactions and arrangements other than deposit and loan balances. Questions 3 through 5 on the old form asked for information about contingent liabilities, letters of credit, collateral, and security agreements. The new form only requests information about deposit and loan balances. Hence, the new form has been retitled "Standard Form to Confirm Account Balance Information with Financial Institutions."

The new form is designed to substantiate information that is presented on the confirmation request. In practice, this is often referred to as "corroboration." The new form is not designed to discover information that does not appear on the confirmation request. The Notice to Practitioners states that the auditor "should be aware that sole reliance on the standard form to satisfy the completeness assertion is unwarranted. " SAS 31, " Evidential Matter " (AU 326), which describes the financial statement assertions made by management, explains that the completeness assertion deals with "whether all transactions and accounts that should be presented in the financial statements are so included." In short, since the new standard form does not request the financial institution to provide any information other than that related to loans and deposits, auditors should not expect financial institutions to disclose information about other transactions or arrangements on the standard form.

How Will This Change Practice?

If, based on the assessment of inherent and control risk, the auditor believes that there is a significant risk that material accounts, agreements, or transactions of which the auditor is unaware may exist, the auditor should explicitly request such information from an appropriate financial institution official.

If the auditor determines that it is appropriate to confirm information other than deposit and loan balances, he or she should send a separate letter, signed by the client, to a financial institution official who is responsible for the financial institution's relationship with the client. Such a request is similar to a request for other information that was not addressed on the old standard form. For example, auditors seeking cut-off bank statements, information about securities held in safekeeping, or lists of authorized check signers have always had to request such information in a letter separate from the standard form. Directing the request for information about other transactions or arrangements to the appropriate financial institution official should enhance the quality of the evidence the auditor obtains since the official will be in a better position to respond to questions about other arrangements with the customer than a financial institution employee working with a balance only" database. To provide the auditor with guidance on preparing letters to confirm other information, the AICPA has prepared three illustrative letters. The letters are appended to the Notice to Practitioners that accompanies all new orders of the revised standard form. The first illustrative letter, presented in Figure 2 omitted, is designed to confirm contingent liabilities. The second and third illustrative letters (not reproduced here) may be used to confirm compensating balances and lines of credit, respectively. However, the letters are designed to be used as models for adaptation in designing letters confirming other types of information such as automatic investment services, futures and forward contracts, and repurchase transactions. Of course, if the client has only one financial institution official responsible for the financial institution's relationship with the client and that official is knowledgeable about the arrangements with the client, the letters may be combined into a single letter requesting the necessary information.

When Should the New Form Be Used?

Auditors should use the new standard form and illustrative letters for confirmations mailed on or after March 31, 1991. To avoid potential confusion, auditors should not use the new standard form before March 31, 1991, nor use the old form after that date.

Copies of the new form and accompanying illustrative letters can be obtained from the AICPA Order Department at 1-800-334-6961 (In NYS, call 1-800-248-0445).

Mr. Sauter is an employee of the American Institute of CPAs and his views, as expressed in the article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process, and deliberation.

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