ORDER OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF MOLDOVA

of December 25, 2000 No. 127

About approval and enforcement of National audit standards

In pursuance of Article 7 (5) the Law of the Republic of Moldova "About auditor activities" N729-XIII of February 15, 1996

I ORDER:

1. Approve National audit standards:

HCA 505 "External confirmations"

HCA 800 "Audit opinion on the audit having the special purpose"

HCA 810 "Studying of forecast financial information"

HCA 910 "Agreements on survey verification of the financial reporting"

HCA 920 "Agreements on accomplishment of the approved procedures concerning financial information"

HCA 930 "Agreements on creation of the financial reporting".

2. Enact in the territory of the Republic of Moldova National audit standards for financial records audit covering the periods since January 1, 2001 (according to Item 1 of this order). Early application is recommended.

 

NATIONAL AUDIT STANDARD 505 "EXTERNAL CONFIRMATIONS"

Introduction

1. This National Audit Standard (NAS) is developed on the basis of the International standard of audit 505 "External confirmations the" (ISA 505 "External Confirmations") accepted by the International federation of accountants (IFAC) in edition of 2000.

Purpose

2. The purpose of this standard is setting standards and recommendations for use by the auditor of external confirmations as the procedure of receipt of auditor proofs.

3. The auditor shall consider need of use of external confirmations for receipt of sufficient and pertinent auditor evidences in support of certain high-quality aspects of the financial reporting. At the same time the auditor shall take into account materiality, assessment of inherent risk and risk of control and also how auditor evidence obtained on the basis of other planned audit procedures will reduce audit risk to is acceptable low level concerning the corresponding high-quality aspects of the financial reporting.

4. According to HCA 500 "Auditor proofs", reliability of auditor proofs depends on their source and nature. HCA 500 also specifies that, as a rule, external auditor proofs are more reliable, than internal auditor evidences, at the same time auditor proofs in writing are more reliable, than auditor proofs in oral form. Respectively, the auditor evidence in the form of written replies to the requests about confirmation obtained by the auditor directly from the third parties which are not connected with the checked economic agent in itself or together with the auditor evidence obtained as a result of carrying out other audit procedures promotes decrease in audit risk concerning the corresponding high-quality aspects of the financial reporting to acceptable level.

5. Process of external confirmation represents process of obtaining and assessment of auditor proofs by means of through traffic from the third parties in response to request about information of rather specific indicator influencing high-quality aspects of the financial reporting provided by management. In case of determination of extent of use of external confirmations the auditor should take into account characteristics of the circle in which the checked economic agent, and also information on actions of potential respondents concerning requests about positive confirmation acts.

6. External confirmations are often used in relation to account balances and their components, however it is not necessary to be limited to these indicators. For example, the auditor can make inquiry about external confirmation concerning contractual conditions or transactions of the economic agent with the third parties. Structure of request about confirmation such is that at first the question of the changes made to the agreement and then of more detailed information concerning these changes is set. External confirmations can be also applicable, for example, to the following Articles:

Remaining balance according to bank accounts and the other information requested from banks.

Account balances of receivables.

The inventories which are at the third parties stored for processing or according to commission agreements.

The documents confirming the property right, being on safe custody at lawyers or financial agents, and also used as pledge.

The investments acquired at stockbrokers, but not received for date of creation of the balance sheet.

The obtained credits and loans.

Account balances of trade liabilities.

7. Reliability of the auditor evidence obtained on the basis of external confirmations depends, in addition to other factors, on the acceptability of the procedures applied by the auditor in case of development of request about external confirmation, direct application of procedures of external confirmation and also on assessment of results. The factors influencing reliability of confirmations include:

* the control exercised by the auditor concerning requests about confirmation and replies to the requests

* characteristics of respondents, and

* the restrictions containing in answers or imposed by management.

Interrelation of procedures of external confirmation with auditor assessment of inherent risk and risk of control

8. HCA 400 "Risk assessment and internal control" considers audit risk and interrelation between its components including: inherent risk, risk of control and risk of nondetection. In the standard the short process description of assessment of inherent risk and risk of control for the purpose of determination of nature, time of carrying out and amount of the procedures for being necessary for decrease in risk of nondetection, and, therefore, audit risk in general, to acceptable level is provided.

9. Besides, HCA 400 specifies that nature and amount of auditor proofs which need to be received on the basis of procedures for being depend on assessment of inherent risk and risk of control, and also on the fact that the estimated levels of inherent risk and risk of control cannot be so low to exclude need of holding procedures for being. Use of external confirmations in respect of certain high-quality aspects of the financial reporting belongs to such procedures for being.

10. In paragraph 48 HCA 400 it is specified that the is higher than assessment of inherent risk and risk of control, the auditor in case of performing procedures shall obtain more auditor evidence in essence. Respectively, with growth of the estimated levels of inherent risk and risk of control the auditor should develop procedures for being for the purpose of receipt of bigger number of proofs or more convincing proofs concerning certain high-quality aspect of the financial reporting. In such situations use of procedures of confirmation can be effective for receipt of sufficient and acceptable auditor evidences.

11. The estimated levels of inherent risk and risk of control are lower, the less auditor can rely on procedures for being for forming of conclusion of rather high-quality aspects of the financial reporting. For example, the economic agent can take the credit with the established repayment schedule which conditions were confirmed by the auditor earlier. If other work performed by the auditor (including necessary test procedures of internal control) specifies that repayment provisions of the credit did not change, and it leads to low estimate of inherent risk and risk of control concerning unpaid balance of the credit, the auditor can limit procedures for being to detailed testing of effected payments and not confirm remaining balance directly at the creditor.

12. Unusual or difficult transactions can be characterized by higher inherent risk and risk of control than simple transactions. If the economic agent made unusual or difficult transaction, and the inherent risk and risk of control were estimated at the high level, follows the auditor, in addition to consideration of documentation which is available for the economic agent to consider need of confirmation of conditions of this transaction with other parties.

External confirmations and high-quality aspects of the financial reporting

13. HCA 500 "Auditor proofs" subdivides high-quality aspects of the financial reporting into the following categories: availability (existence), rights and obligations (recognition), truthfulness, completeness, assessment, measurement, representation and disclosure. Though external confirmations can provide auditor proofs concerning these high-quality aspects, efficiency of external confirmation in providing auditor proofs concerning specific high-quality aspect is not identical.

14. External confirmation of account balance of receivables provides strong auditor evidences concerning its existence for certain date. External confirmation also provides auditor proofs concerning functioning of procedures of completion of the accounting period. However, such confirmation optionally provides all necessary auditor proofs concerning assessment as the inquiry sent to debtor about confirmation of its solvency is almost impracticable.

15. Similarly, in case of the inventory stocks which are at the third party according to the commission agreement, external confirmation most likely will provide strong auditor evidences concerning such high-quality aspects as availability and the rights and obligations, however it will not provide auditor proofs concerning assessment of these inventories.

16. The purposes which are set by the auditor in case of selection of information requiring confirmation exert impact on relevance of external confirmations in the course of audit of specific high-quality aspect of the financial reporting. For example, in case of audit of completeness of trade liabilities, the auditor needs to obtain the evidence of lack of the essential not reflected obligations. At the same time the inquiries about confirmation sent to prime vendors of the economic agent request to provide copies of reconciliation statements directly to the auditor even if debts on these accounts are not revealed, are more effective procedure for detection of the obligations which are not reflected in accounting in comparison with the procedure of selection of the accounts requiring confirmation from among the large amounts reflected in the magazine of accounts payable.

17. In case of receipt of auditor proofs concerning high-quality aspects of the financial reporting for which application of procedures of external confirmation is insufficient the auditor should resort to other audit procedures for the purpose of amendment or replacement of procedures of confirmation.

Structure of request about external confirmation

18. The auditor shall adapt requests about external confirmation for specific purpose of audit. In case of creation of request the auditor should take the affected high-quality aspects of the financial reporting, and also factors influencing reliability of confirmations into account. Such factors as request form about external confirmation, last experience of agreement performance exert impact on creation of requests as they influence directly reliability of the auditor evidence obtained on the basis of procedures of external confirmation on carrying out audit or other similar agreements, nature of confirmable information and characteristic of the respondent.

19. Besides, in case of creation of request, the auditor should consider such information which respondents will be able to confirm directly as it influences percent of answers and nature of the obtained auditor evidence. For example, systems of financial accounting of some respondents will be able to confirm rather separate transactions, than account balance in general. Besides, respondents can not always confirm certain information as, for example account balance of receivables in general whereas confirmation of the amount according to the certain invoice entering such remaining balance comes easy.

20. The request about confirmation, as a rule, includes permission of management of the economic agent to disclosure of information to the auditor. Respondents will respond more willingly to the request if permission of management to disclosure of information is applied to it, besides, in certain cases they cannot respond to the request without such permission.

Use of positive and negative confirmations

21. The auditor can use positive or negative form of external confirmation or their combination.

22. In positive request form about external confirmation of the respondent ask to answer surely the auditor by means of expression of consent with information which is available in request or filling of missing information. The response to such request, as a rule, provides reliable auditor proofs. Despite it, there is risk that the respondent will respond to the request, without checking information accuracy. The auditor cannot usually find whether this fact took place. However the auditor can reduce this risk, without including in request about positive confirmation of the amount (or other information), and suggesting the respondent most to fill the amounts or to provide other information. On the other hand, use of the blank forms of requests about confirmation can lower percent of answers as their filling will demand from respondents of additional efforts.

23. In negative request form about external confirmation of the respondent ask to answer only in case of disagreement with information provided in request. However, without having received the response to such request, the auditor should mean that there are no obvious auditor proofs that the third party addressee received request and checked information containing in it for accuracy. Therefore, use of negative request form about confirmation, as a rule, provides less reliable proofs than use of positive request form, and the auditor should consider need of holding other procedures for being in addition to negative confirmations.

24. Requests about negative confirmation can be used for decrease in audit risk to acceptable level in cases when:

(a) the estimated levels of inherent risk and risk of control are low;

(b) large number of small remaining balance is involved;

(c) significant amount of mistakes is not expected;

(d) the auditor has no bases to believe that respondents will ignore requests.

25. Use of combination of positive and negative forms of confirmation is allowed. For example, if the general account balance of receivables consists of small amount of large remaining balance and large number of small remaining balance, the auditor can make the decision on feasibility of confirmation:

- all large remaining balance or selection of large remaining balance with use of positive form of requests, and

- selections of small remaining balance with use of negative form of requests.

Management line item on external confirmations

26. If the auditor tries to confirm remaining balance or other information, and the management appeals not to do it, the auditor shall analyze whether there are strong reasons for similar request, and also to obtain the evidence of its justification. If the auditor grants request of management not to apply the procedure of external confirmation to any question, it shall apply alternative procedures for the purpose of receipt of sufficient and pertinent evidences on this matter.

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