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. …