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Assessing the risks of fax confirmations.

ASSESSING THE RISKS OF FAX CONFIRMATIONS

Should a FAX be used as audit evidence? David B. Pearson, CPA, a partner of Ernst & Young, New York, and Douglas P. Sauter, CPA, a technical manager in the American Institute of CPAs auditing standards division, New York, discuss the potential risks of using this new technology. Ernst & Young Canada contributed to this article. Facsimile, or FAX, machines appear firmly established as a means of communication in the business world. Some auditors, in an attempt to improve response rates and times to confirmation requests, have used the FAX machine as an alternative to traditional mail services. Other auditors have expressed skepticism. Here's an overview of the risks associated with FAX confirmations and some precautions auditors may wish to take when using them.

FACTS ABOUT FAX

A facsimile terminal is like a photocopier with a telephone connection. The sending machine converts a document into electrical signals and transmits them over standard telephone lines to the receiving machine, which prints a copy of the original document. The two major concerns about using a FAX as audit evidence are

1. Ascertaining the source of the FAX.

2. The vulnerability of the FAX to deterioration.

The auditor can minimize--and in some situations eliminate--these concerns by taking a number of precautions.

PROBLEM #1: ASCERTAINING THE SOURCE

Good auditing practice dictates the auditor maintain control over confirmation requests and returned confirmations. In short, the confirmation process includes

* Selecting the items for which confirmation is to be requested.

* Communicating the requests to third parties.

* Obtaining the responses directly from the third parties.

* Evaluating the responses.

To lose control at any point jeopardizes both the reliability of the entire process and the acceptability of a confirmation as evidence. One way the auditor could lose control would be for the confirmation to come from a party other than the one indicated on the response.

Facsimile machines maintain a log of documents sent and received. Each entry on the log is reprinted on the applicable page of the transmitted document. The entry usually includes the name and FAX number of the sender, date and time of the transmission and number of pages in the document.

At first glance, the logging procedure appears to be a useful control to ascertain the FAX's source, but it isn't foolproof. Transmitting FAX machines can be reprogrammed with a false FAX number and name. An unscrupulous client could, using photocopies of the appropriate letterhead and signatures, create a bogus confirmation response that could look as though it had originated from the appropriate party.

How can the auditor verify the source of a FAX? The auditor can telephone the FAX's purported sender to confirm

* He or she indeed has transmitted the document.

* The document's exact contents.

Such a phone call should reveal any bogus transmission or alteration of the transmitted document. In addition, the auditor should request that the purported sender mail the original confirmation directly to the auditor.

Another way to verify the source of a FAX is to use the "polling" feature that most FAX machines have. This requires both parties to the communication to make advance arrangements for the transmission. Rather than the sender initiating the call, the receiving party polls or requests the document by calling the sender's machine. Although the feature was designed to transfer transmission costs to recipients, it also may be used by auditors to ascertain the true sources of FAX documents. Thus, if the auditor is the party who contacts the source to obtain a confirmation response, its origin is not in question.

The disadvantage of polling is that it requires significant planning. The sender and receiver must agree on the date and time of the transmission and the sender must provide the receiver with the necessary information, including access codes. Finally, not all FAX machines are created equal; some do not have the polling feature.

PROBLEM #2: VULNERABILITY TO DETERIORATION

Typically, the print on FAX paper fades quickly; FAX responses that have been retained in the workpapers for even a few years may be difficult, if not impossible, to read. Thus, even when the auditor has determined a FAX response is valid, he or she should make a photocopy to include with the original FAX response in the audit workpapers. Such a photocopy would preserve the information on the FAX. The auditor also should try to obtain the original confirmation--even if it arrives after the report date.

USING FAX CONFIRMATIONS

In evaluating a FAX confirmation response, the auditor should judge whether he or she has adequately addressed the potential problems that can adversely affect its reliability. By taking the suggested precautions, the auditor can treat the FAX response as valid audit evidence and preserve that evidence in the workpapers.

Ray Whittington, CPA director, audit research American Institute of CPAs New York, New York
COPYRIGHT 1990 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Sauter, Douglas P.
Publication:Journal of Accountancy
Date:Mar 1, 1990
Words:802
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