PCAOB introduces enhanced confirmation process standards for auditors

The Public Company Accounting Oversight Board (PCAOB) has announced an update to its auditing standards with the introduction of a new standard, Accounting Standard 2310 (AS 2310) - The Auditor’s Use of Confirmation. The move aims to modernize and strengthen the requirements for the confirmation process, a crucial aspect of auditing that plays a major role in ensuring audit quality and investor protection. The new standard will completely replace the existing AS 2310. The initial proposal for this update occurred in December 2022 when the PCAOB issued the proposal for public comment. Over the course of the following 9 months, public comments were considered while refining the proposal.    

AS 2310 –The Confirmation Process, the existing standard, was initially drafted over 30 years ago and has seen minimal amendments since its adoption by the PCAOB in 2003. The need for change became apparent due to evolving industry practices, such as the increased use of electronic communications and third-party intermediaries in the confirmation process.  

In 2009, the PCAOB issued a concept release, seeking public comments on potential amendments to the existing confirmation process standard. A subsequent proposal in 2010 aimed to strengthen the standard but faced concerns about being overly prescriptive. However, neither the concept release nor the 2010 proposal, was adopted at that time. 

The PCAOB recognized that enhancing AS 2310 and revisiting the proposed changes from the 2010 proposal could lead to improvements in the quality of audit evidence obtained by auditors. The new standard is designed to be principles-based, applying to both paper-based and electronic confirmation methods. It is closely integrated with the PCAOB’s risk assessment standards, emphasizing the auditor’s responsibility for obtaining relevant and reliable audit evidence through the confirmation process. 

Key highlights of the new standard include: 

1. Confirmation of cash and cash equivalents: A new requirement is introduced, mandating the confirmation of cash and cash equivalents held by third parties, or alternatively obtaining relevant and reliable audit evidence by directly accessing information from knowledgeable external sources. This previously had been a best practice, but not required under guidance. 
2. Accounts receivable confirmation: The existing requirement regarding confirming accounts receivable is retained with provisions for situations where it may not be feasible to perform confirmation procedures directly (i.e. when using an intermediary). 
3. Negative confirmation requests: The new standard states that the use of negative confirmation requests alone is insufficient for providing appropriate audit evidence. There are limited situations where negative confirmation requests may be used to supplement other substantive audit procedures. 
4. Auditor’s control over the confirmation process: Additional emphasis is placed on the auditor's responsibility to maintain control over the confirmation process, including selecting items to be confirmed, sending confirmation requests, and receiving confirmation responses. 
5. Alternative procedures: Situations are outlined where alternative procedures should be performed by the auditor with example procedures provided to obtain relevant and reliable audit evidence for selected items (i.e. cash, accounts receivable, transaction terms, and accounts payable).  

On Dec.1, 2023, the Securities and Exchange Commission (SEC) approved the new standard and related amendments. These will go into effect for audits of financial statements for fiscal years ending on or after June 15, 2025. The changes are intended to enhance audit quality, aligning with the ever-changing landscape of financial reporting and technological advancements in the auditing process. Companies undergoing audits can anticipate subtle changes to the confirmation process that will contribute to an overall enhancement in the quality of the audit.  

For full details on the standard please see PCAOB AS 2310.