(a) Four examples of external confirmations
Four examples of external confirmations are:

• Accounts receivable letter
• Legal letter
• Bank report letter
• Inventory held by third parties

(b) Assertions achieved and not achieved by each example (only one example of each required).

Accounts receivable letter

• This letter provides evidence of the existence of the receivable when a reply is returned from that receivable direct to the auditor.
• The letter provides evidence on cut-off because revenue or cash receipts recorded in the incorrect accounting period will have to be reconciled to the balance provided by the receivable.
• The letter does not provide evidence of completeness of the receivables balance because receivables may not query balances which are understated.
• The letter does not provide evidence of the valuation of the receivables balance because the receivable cannot be expected to list all outstanding balances and external confirmation of the debt does not mean it will be paid.

Legal letter

• A legal letter provides evidence as to the existence of claims at the period end as the lawyer will confirm specific claims.
• However, the letter does not necessarily confirm the valuation of claims due to uncertainty about the future or the completeness of any legal claims as lawyers do not normally provide a list of all claims – they prefer to comment only on claims they are actually asked about.

Bank report letter

• A bank confirmation letter provides good evidence on the existence of the company’s bank accounts as the bank has confirmed this information in writing.
• A bank letter cannot necessarily be relied on to provide complete or accurate information. Most banks place a disclaimer on the letter of ‘errors and omissions excepted’ indicating that the auditor must review this evidence against other cash and bank evidence obtained.

Inventory held by third parties

• A letter from the third party holding the inventory will provide evidence of the existence of that inventory because the third party has confirmed this in writing.
• However, the letter does not provide evidence regarding the valuation of the inventory; confirming something exists does not necessarily mean it is in good condition.