Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence

External Confirmations, Inventory Counts and Specific Audit Evidence

Updated 11 October 2026 · Fact-checked

An external confirmation is evidence the auditor gets directly from a third party, such as a customer or bank (ISA 505). Inventory count attendance (ISA 501) lets the auditor observe existence and condition. For both, you plan the procedure, control it yourself, evaluate results and follow up exceptions. Also cover litigation and segment information.

Understand External Confirmations, Inventory Counts and Specific Evidence

Audit evidence is stronger when it comes from outside the client and when the auditor controls it. External confirmations and inventory count attendance are two of the most common ways to get that evidence. Both are heavily examined in AAA, usually inside a Section A case study or a Section B question where you must apply the procedure to the scenario.

External confirmation (ISA 505) means audit evidence obtained as a direct written response to the auditor from a third party. The response can be on paper, electronic or another medium. Typical uses are bank balances, trade receivables, payables, inventory held by third parties, and legal letters. A confirmation is most useful for existence of receivables and for rights and obligations. It is weaker for valuation, because a customer may agree a balance but still not be able to pay it.

Positive confirmations ask the recipient to reply in all cases, either agreeing the balance or giving the correct figure. Negative confirmations ask for a reply only if the recipient disagrees. Negative requests give weaker evidence, because no reply may mean agreement or simply that the request was ignored. The auditor keeps control of the process: selecting the items, sending the request, and receiving the reply directly. If management refuses to let the auditor send confirmations, the auditor asks why, seeks evidence on the validity of the reasons, and considers the effect on the risk assessment, including the risk of fraud. The auditor then performs alternative procedures. If the refusal is unreasonable and no alternative evidence is available, the auditor communicates with those charged with governance and considers the effect on the opinion.

Where there is no reply, the auditor performs alternative procedures, for example checking cash received after the year end to remittance advice, and examining dispatch documents and invoices. Where replies show differences, the auditor investigates whether they are errors or timing differences, such as cash in transit or goods in transit. The auditor also considers whether the differences indicate fraud.

Inventory count attendance (ISA 501) applies when inventory is material. The auditor attends the count unless it is impracticable. The aims are to evaluate management's count instructions and procedures, observe the count, inspect the inventory and perform test counts. The auditor tests both directions: from the floor to the count sheets for completeness, and from the count sheets to the floor for existence. The auditor also watches for damaged, obsolete or slow-moving items, which affect valuation, and notes cut-off details such as the last goods received and dispatched numbers. If the count is on a date other than the year end, the auditor tests the movements between the count date and the year end. If attendance is impracticable, for example because of the location or danger, the auditor performs alternative procedures. If these cannot give enough evidence, the opinion is modified.

ISA 501 also covers litigation and claims. The auditor designs procedures to identify claims that may cause a material misstatement. These include enquiry of management and those charged with governance, review of minutes and legal expense accounts, and, where needed, communication with the entity's external legal counsel. ISA 501 also covers segment information: the auditor obtains evidence on whether the segment disclosures comply with the applicable framework, by understanding management's methods and testing how they were applied.

Key rules to remember

Positive vs negative confirmation: Positive = reply needed in all cases; Negative = reply only if the recipient disagrees; Positive gives stronger evidence. Negative is suitable only in limited low-risk circumstances where many small balances exist.
Control of the confirmation: Auditor selects items + sends request + receives reply directly; If the reply goes via the client, reliability falls sharply.
Count testing directions: Floor to sheets = completeness; Sheets to floor = existence; State both directions in any inventory count answer.
Count date not at year end: Year-end inventory = count-date inventory + receipts − issues in the roll-forward period; The auditor tests the movements between the count date and the year end.
Non-response or impracticable attendance: Alternative procedures; if still insufficient, modify the opinion; Opinion modification depends on materiality and pervasiveness (ISA 705).

How to solve External Confirmations, Inventory Counts and Specific Evidence questions

Use this order for any question asking about confirmations, count attendance or specific evidence. Link each point to the scenario facts.

1Identify the balance and the assertion at risk, such as existence of receivables or completeness of inventory.
2Choose the right evidence source: confirmation, count attendance, legal letter or other procedure, and say why it fits.
3Plan the procedure: sample selection, form of confirmation, or review of count instructions before the count.
4Perform and control: auditor sends and receives requests, observes the count, performs test counts in both directions and notes cut-off details.
5Handle exceptions: investigate differences, perform alternative procedures for non-replies, test roll-forward if the count is not at the year end.
6Evaluate the evidence: is it sufficient and appropriate? Consider fraud indicators and reliability.
7Conclude on the effect: adjust work, report to those charged with governance if needed, and consider modification of the opinion.

Quickest way: Assertion, source, control, exceptions

When to use it: Use this when time is short and the requirement says 'describe the audit procedures' or 'explain the evidence you would seek'.

Name the assertion first, in a few words.
List three or four procedures, each tied to a scenario fact.
Say who controls the process: the auditor.
State what you do with exceptions: alternative procedures and follow-up.
Finish with one line on the impact on the opinion if evidence is insufficient.

Common mistakes in External Confirmations, Inventory Counts and Specific Evidence

Saying a receivables confirmation proves the balance is recoverable.
Students assume agreement means the customer will pay.
Fix: Say confirmations mainly support existence and rights. Test valuation through after-date receipts, ageing review and credit control information.
Letting the client post or collect the confirmation requests.
Students focus on the content, not on control of the process.
Fix: State that the auditor sends the requests and receives replies directly, to protect reliability.
Listing only floor-to-sheet count tests.
Students think of the count as checking that items exist.
Fix: Include both directions: completeness from floor to sheets, existence from sheets to floor.
Ignoring cut-off at the count.
Students concentrate on quantities and miss movements around the count.
Fix: Record the last goods received and dispatched numbers and later check that they were recorded in the correct period.
Treating non-replies as agreement.
Silence feels like no problem, especially with negative confirmations.
Fix: Perform alternative procedures for non-responses, such as cash received after the year end and dispatch records.
Giving generic procedures with no link to the case.
Students recall a list and ignore the scenario.
Fix: Tie each procedure to a named fact in the case, such as a remote warehouse or a large disputed customer.

Worked examples

Example 1

You are auditing Zenith Ltd, which has trade receivables of $4.2 million, 38% of total assets. Several customers are known to dispute invoices. Management asks you not to send confirmations to the three largest customers. Explain how you respond and what procedures you perform.

Show the solution

Assertion and risk: existence and rights over receivables are at significant risk because of disputes. The refusal also raises a fraud concern.
Ask management why. Seek evidence on whether their reasons are valid.
Consider the effect on the risk assessment, including the risk of fraud, and on the nature, timing and extent of other procedures.
If the reasons are valid, perform alternative procedures on those three customers: check cash received after the year end to remittance advice and bank statements, inspect dispatch notes, invoices and signed delivery evidence, and review correspondence on the disputes.
Send positive confirmations for other selected balances, controlling the process directly.
If the refusal is unreasonable and no alternative evidence is available, communicate with those charged with governance and consider the opinion modification under ISA 705.

Answer: Ask management for reasons and test their validity. Raise the fraud risk assessment. Perform alternative procedures on the three customers and confirm other balances directly. If the refusal is unreasonable and evidence stays insufficient, communicate with those charged with governance and consider a modified opinion.

Example 2

You will attend the year-end count at Brightwood Ltd, which holds inventory in two warehouses, including some stored on shelves with damaged packaging. Explain the procedures you perform before and during the count.

Show the solution

Before: review the prior-year file, discuss the count plan with management, and review count instructions for cut-off, controls over movements, and identification of damaged or obsolete items.
Assess the risk areas: the damaged goods affect valuation, and two sites raise a need to allocate team members.
During: observe staff following the instructions and test controls over count sheet numbering and movements.
Perform test counts from floor to sheets for completeness and from sheets to floor for existence.
Inspect items for damage or obsolescence and record details for valuation testing.
Record cut-off: last goods received and dispatched numbers, and copies of the final sheets for later tracing to the inventory records.
After the count: trace test counts to the final inventory listing and check cut-off documents.

Answer: Review instructions in advance, observe the count, test count in both directions, note damaged items for valuation, record cut-off data, and trace the final count sheets to the inventory listing afterwards.

Exam tips

In a case study, name the specific risk before listing procedures. Markers reward application.
Always state who controls the confirmation process. It earns an easy mark.
For inventory count answers, include both test directions and cut-off. Missing either costs marks.
When evidence is poor, finish by linking to the opinion modification. Show the professional skills mark by being concise and logical.
For litigation, include enquiry of management, review of minutes and legal expense accounts, and legal counsel communication.

Practice questions from Audit procedures and obtaining evidence

External Confirmations, Inventory Counts and Specific Evidence in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

External Confirmations, Inventory Counts and Specific Evidence: frequently asked questions

What is the difference between positive and negative confirmations?

A positive confirmation asks for a reply in every case, either agreeing the balance or giving the correct figure. A negative confirmation asks for a reply only if the recipient disagrees. Positive confirmations give stronger evidence.

What can I do if a customer does not reply to a confirmation?

Perform alternative procedures. Typical examples are checking after-date cash receipts and inspecting dispatch documents and invoices. Choose the procedure to match the assertion at risk.

Is attending the inventory count always required?

If inventory is material, the auditor attends unless it is impracticable. If attendance is impracticable, the auditor performs alternative procedures. If they still cannot get enough evidence, the opinion is modified.

What if the count is not on the year-end date?

The auditor tests the movements between the count date and the year end, such as receipts and issues. This confirms the year-end inventory figure is supported.

How do auditors get evidence on litigation and claims?

They make enquiries of management and those charged with governance, review minutes and legal expense accounts, and may communicate with external legal counsel. This helps identify claims that could cause material misstatement.