The Public Company Accounting Oversight Board is seeking comment on a proposed new standard for auditors to pursue third-party confirmations of various details in corporate financial statements.

In the audit process, confirmation refers to direct communication between the auditor and a third party, such as a vendor or a customer, to verify assertions contained in a company’s financial statements. Auditors rely on confirmations to verify the existence, completeness, or value of items appearing in corporate accounts.

The proposed standard would both expand and modernize the requirements of AU Section 330, The Confirmation Process, a 15-year-old audit rule that governs how auditors should go about pursuing third-party confirmations and what they may accept as audit evidence. Martin Baumann, PCAOB’s chief auditor and director of professional standards, said the proposal reflects the importance of audit evidence obtained from third parties and strengthens and extends the requirements for using confirmations.

PCAOB member Steven Harris said the proposed standard expands the use of the confirmation process by requiring auditors to confirm receivables that arise from credit sales, loans, or other transactions; cash and other relationships with financial institutions; and other accounts or balances that pose a significant risk to the financial statements. Currently, auditors are required only to verify receivables if they arise from the sale of goods or services in the normal course of business.

The standard also would relax the requirements for confirmations written on paper, reflecting advances in electronic communication. The proposal would allow auditors to use electronic media to send confirmation requests and receive confirmation responses, and it would make provisions under certain circumstances for auditors to use direct access to a third party’s records to obtain the audit evidence they need.

Acting Chairman Daniel Goelzer said the proposed standard “would more explicitly incorporate consideration of the risk of error or fraud into the selection, design, and planning of confirmation procedures.” That would make it consistent with other standards that are also developing, such as new standards around risk, he said. “In its emphasis on fraud and other misstatement risk, this proposal dovetails with the approach in the proposed risk assessment standards.”

The PCAOB first unveiled its thinking about audit confirmation in a concept release published in April 2009. That release drew 24 comments, which the PCAOB says it took into consideration in developing the current proposal. The board is accepting comments on the proposal through Sept. 13.

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