Question Tag: Assertions

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  • 10 Marks

AA – Nov 2019 – L2 – Q2a – Audit and Assurance Evidence

Explains examples of external confirmations and identifies relevant and irrelevant audit assertions.

ISA: 505 External Confirmations states that ‘the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level’. An Auditor may obtain external confirmations from third parties to corroborate the audit evidence already available with the auditor. The Auditor shall determine whether positive or negative request is appropriate given the condition.

Responses or events of non-responses are required to be evaluated. Responses may be unreliable if they are served indirectly to the auditor, not served by the intended person, or transmission is compromised, and the auditor may have to perform additional procedures to resolve doubts and suspicion. In events of non-responses or management refusal to permit the auditor to seek confirmations, the auditor shall assess if modification in the auditor’s report is necessary.

Required:
Explain FOUR (4) examples of external confirmations and for each one identify:
i) An audit assertion that the external confirmation supports; and
ii) An audit assertion that the external confirmation does NOT support.
(10 marks)

Examples of External Confirmations and Related Audit Assertions:

  1. Debtor’s Confirmation Letter
    • Supports Assertion: Existence – The letter provides evidence of the existence of the debtor when a reply is returned directly to the auditor.
    • Does NOT Support Assertion: Completeness – The debtor may not query balances that are understated, so the letter does not verify the completeness of the debtor balance.
  2. Solicitor’s Letter
    • Supports Assertion: Existence – The solicitor confirms the existence of claims at the period end, providing evidence of the existence assertion.
    • Does NOT Support Assertion: Completeness – Solicitors generally comment only on the claims they are asked about, so they may not provide a complete list of all claims.
  3. Bank Report Letter
    • Supports Assertion: Existence – The letter provides good evidence on the existence of the company’s bank accounts.
    • Does NOT Support Assertion: Accuracy – Banks may include disclaimers like “errors and omissions excepted,” which limit the letter’s accuracy as a complete verification.
  4. Certificate on Stock Held by Third Parties
    • Supports Assertion: Existence – The certificate confirms that the stock physically exists at a third-party location.
    • Does NOT Support Assertion: Valuation – Confirming the stock’s existence does not necessarily provide evidence on its condition or valuation.

(Total: 10 marks)

  • 3 Marks

AA – Dec 2022 – L2 – Q5c – Audit and Assurance Evidence

Explains three assertions relevant to the audit of tangible non-current assets.

You were recently appointed by Danso & Co Chartered Accountants. You were part of the team that audited a construction company with a huge asset base. Your Manager reviewed your file and raised questions that audit evidence obtained was not relevant since it did not address any assertions of property, plant, and equipment. ISA 500: Audit Evidence requires that audit evidence must be sufficient, relevant, and reliable.

Required:
Explain THREE (3) assertions relevant to the audit of tangible non-current assets

Assertions relevant to the audit of tangible non-current assets:

  • Completeness: Ensuring that all non-current assets are recorded in the financial statements.
  • Existence: Verifying that the assets physically exist and are in the company’s possession.
  • Valuation: Checking that the assets are correctly valued, including the accuracy of depreciation calculations.
    (3 marks)
  • 6 Marks

AA – May 2018 – L2 – Q4b – Audit and Assurance Evidence

Identifies key financial statement assertions for year-end account balances and describes substantive procedures related to inventory.

b)
i) Identify and explain two financial statement assertions relevant to account balances at the year-end. (2 marks)
ii) For each identified assertion, describe a substantive procedure relevant to the audit of year-end inventory.

(4 marks)

(i) Financial Statement Assertions for Year-End Account Balances:

  1. Existence:
    This assertion confirms that assets, liabilities, and equity balances actually exist as of the year-end date.
  2. Valuation and Allocation:
    This assertion ensures that assets, liabilities, and equity interests are recorded at appropriate amounts, and any necessary adjustments have been made.

(Total: 2 marks)

(ii) Substantive Procedures for Inventory Audit Based on the Identified Assertions:

  1. Existence (Substantive Procedure):
    • Physical Count Attendance: Attend the year-end inventory count and select a sample of items from the inventory records, tracing them to their physical existence in the warehouse to ensure that the recorded inventory actually exists.
  2. Valuation and Allocation (Substantive Procedure):
    • Cost Valuation: Select a sample of inventory items and compare the recorded cost in the inventory records to the relevant purchase invoices to ensure that inventory is valued correctly at cost.
    • Net Realisable Value Test: For the same sample, review post-year-end sales to ensure that the net realisable value (selling price less costs to complete and sell) is higher than the recorded cost, to ensure inventory is not overstated.

(Total: 4 marks)

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