PART 1: IN AUDITING - SA 505 External Confirmations

As per SA 505 External Confirmations, confirmation is audit evidence obtained as direct written response from 3rd party.

1. Short-Form Confirmation:
Just states the balance.

"Please confirm balance of Rs. 10,00,000/- due as on 31.03.2024"

Advantage: Easy for confirming party to respond. Disadvantage: Low evidence value, confirms only existence, not terms.

2. Long-Form Confirmation:
Includes detailed break-up, terms, security, interest, invoice wise details.

"Please confirm balance of Rs.10,00,000 comprising Invoice 101 for Rs.4L due on... rate of interest 18%, secured by..."

It asks confirming party to provide the requested information like individual invoice amount versus total balance. This is positive blank form vs invoice form.

The Conflict:

When you send long-form, the debtor says - "We confirm Rs. 8 Lakh, not 10 Lakh" - giving an exception. Short-form may be returned signed without checking, creating false assurance.

Standard says:

• Positive confirmation asks party to reply whether they agree or disagree. More reliable than negative confirmation.
• Blank form may be less efficient because more non-responses are likely to occur.
• If management refuses to allow auditor to send confirmation, auditor shall inquire reasons and seek evidence as to validity.

Resolution as per ICAI:

1. Materiality: For material balances, long-form / detailed positive confirmation is mandatory. Short-form alone is insufficient.
2. Risk: When assessed risk of material misstatement is high, do NOT use negative form or short form.
3. Conflict Rule: If long-form confirmation differs from short-form confirmation or from books, long-form details prevail for investigation. Auditor must treat exception as misstatement and perform alternative procedures.

PART 2: COMMERCIAL LAW - CONFIRMATION OF ACCOUNTS AS CONTRACT & ACKNOWLEDGMENT

This is where most litigation happens - Long Form vs Short Form Balance Confirmation Letter.

Short-Form Confirmation: Letter stating "You owe Rs. X as on date"

Long-Form Confirmation: Ledger statement + terms + interest + securities + signed by debtor.

Why Conflict Arises:

Debtor gives short-form confirmation for Rs. 10 Lakhs, but later when you sue, he shows long-form ledger reconciliation showing only Rs. 6 Lakhs is payable after adjusting returns, TDS, etc.

Which will court believe?

CASE LAWS - Indian Courts:

1. Confirmation as Written Contract - Delhi High Court 2024

Confirmation Of Accounts Signed By Debtor Sufficient To Sustain Summary Suit Under Order XXXVII CPC: Delhi High Court

Justice Neena Bansal Krishna held that a confirmation of accounts signed by a debtor acknowledging a loan transaction and the applicable interest terms constitutes a written contract and can form basis of summary suit under Order XXXVII CPC.

Principle: If confirmation is in long-form with interest terms and signature, it IS a contract. Short-form without terms is only acknowledgment.

2. Balance Sheet / Confirmation as Acknowledgment u/s 18 Limitation Act - SUPREME COURT TRILOGY

This is the biggest Long vs Short form conflict for limitation extension.

Asset Reconstruction Company (India) Ltd vs Bishal Jaiswal & Anr. (2021) 2 SCC 21 - 3-Judge Bench RF Nariman: An entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of Limitation Act. Set aside NCLAT 5-member bench in V Padmakumar which said balance sheet cannot be considered.

Justice Indira Banerjee Bench: Entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgment under Section 18

Kashinath Sankarappa case line: The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to... within meaning of Section 18 and extend period of limitation

Rule: Long-form balance sheet entry = Valid acknowledgment even if short-form confirmation letter was not sent. Short-form ledger print alone may not be enough.

3. Mere Confirmation Letter Insufficient - Tax Law

Godwin Maria Visuvasam Vs. ITO (ITAT Chennai) & M/s Janatha Trading Corporation Vs DCIT: Merely furnishing of confirmation letter by a creditor, as it again well settled, does not would at best only establish identity of the creditors. There was nothing on record establishing creditworthiness and genuineness.

And ITAT Cochin: Though amount was contributed by partners as capital introduction, only confirmation letters from partners cannot prove all ingredients of section 68

Principle: Short-form confirmation proves only identity. For genuineness, you need Long-form: creditworthiness, bank statement, source of funds.

4. LFAR vs Statutory Audit Report Conflict - Banking

Long Form Audit Report is comprehensive document that goes beyond standard audit opinion to provide detailed analysis of Internal Control Systems. RBI advised public sector banks to obtain LFAR from auditors in 1985. The main audit report is to be submitted as per Banking Regulation Act, 1949. LFAR is separate report to bank management

Conflict Rule laid down by RBI: If there is conflict between Short-Form Main Audit Report (unmodified opinion) and Long-Form LFAR (reporting fraud, window dressing, excess cash), LFAR prevails for management and regulatory action. Short-form is for shareholders, Long-form is early whistle blower.

FINAL PRINCIPLE TO RESOLVE CONFLICT