Have any others changed their negative confirmation process. Our external auditor recently provided us with the following commentary. Interesting...

550 Use of negative confirmations
Overview

The AICPA Audit Guide on Audit Sampling contains discussion of the appropriate uses of negative confirmations. Negative confirmation requests may be used to provide evidence to supplement other audit evidence obtained but do not involve audit sampling. The results obtained from use of negative confirmations may be used in the same manner as those from a walkthrough test but cannot be extrapolated to a population of accounts.

Negative confirmations are commonly used in conjunction with other audit procedures in auditing trade accounts receivable, contributions receivable and loans receivable and deposits in financial institutions. While negative confirmations may be used in these and other situations, the level of evidence they provide is not as strong as that provided by other audit procedures. As a result, the benefits of using negative confirmations in the future should be challenged.

What the Standards Require

Section 1.12 of the Audit Sampling guide includes the following:

Occasionally, auditors perform such procedures as checking arithmetical calculations or tracing journal entries into ledger accounts on a test basis. When such procedures are applied to less than 100% of the arithmetical calculations or ledger postings that affect the financial statements, audit sampling may not be involved if the procedure is not a test to evaluate a characteristic of an account balance or class of transactions, but is intended to provide only limited evidence that supplements the auditor's other evidential matter regarding a financial statement assertion. Another example of this type of procedure is confirmation using negative confirmation requests. Because unreturned negative confirmations do not provide explicit evidence that the intended third party received the request and verified the information contained on it is correct, they do not provide an adequate basis for projecting misstatement to the population of accounts. Therefore, audit sampling is not involved in the use of negative confirmations. However, negative confirmations may be used to supplement positive confirmations.

Auditing standards (AU330) require confirmation of accounts receivable as part of audit procedures, unless specific criteria are met and documented. The standards do not, however, define the quantity or type of confirmations that should be used. As a result, judgment is involved in determining whether positive or negative confirmations should be used in specific circumstances. Other regulatory agencies may also require use of confirmations in specific industries (such as in financial institutions).

What do your state banking regulations/rules have to say on the subject?

In Minnesota, confirmations are required as part of the annual Director's Examination.

Additionally, our bonding company asks us every year if we confirm at least 20% of our respective accounts.

You'll have to satisfy the requirements of more than the AICPA.