Confirmation

Quick Summary of Confirmation

The written statement acknowledging a securities transaction. More generally, any formal communication which reiterates or verifies an agreement.

A Confirm or Confirmation is a tool used by external auditors (Public Accounting industry) to confirm the internal records of the client they are serving (auditing) to the consent of outside parties involved with specific operations of the client’s business. Confirmations are one of the main tools auditors employ to satisfy the need for evidential matter (see [SAS 31]]) in meeting the Existence assertion.

Several common types of confirms are:

• Bank confirmation – letters solicited of banks with which the client maintains a relationship, requesting confirmation of the client’s cash balance at that bank as of a certain date (last day of reporting period).
• Legal confirmation – letters solicited of law firms retained by the client, requesting a summary of contingent liabilities.
• Customer confirmations (aka “confirmation of receivables”) – If the auditor is confirming the accounts receivable balance, an AR confirmation is sent to selected customers of the client.
• Investment confirmation – Confirmations of the client’s investment accounts (i.e. the client’s spare cash invested to yield a marginal return) is not generally categorized as a confirm, but is technically a confirmation nonetheless. The client’s investment-maintaining brokerages are requested for a detail of the client’s investment performance over the reporting period.

Completed customer confirmations are difficult to receive in the entirety of the population sent out, as those receiving them have little incentive to complete and return them. Bank, legal, and investment confirmations, however, are usually returned, as it is in those parties’ interests to maintain a professional relationship with the audited company. Once received, the auditor will see if the confirmed balances and legal issues are reflective of the client’s records.

Confirmation is also the term used when a technical analysis indicator(s) is used to “confirm” a predicted future price movement.

Confirmation is usually required when a particular indicator or candlestick pattern is considered a weak indicator. For example, the Downside Tasuki Gap shown below should be used in conjunction with some form of confirmation, either a gap down opening or a bearish candle following the pattern.

Illustration of Confirmation with the Downside Tasuki Gap candlestick pattern

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