Assertions and audit evidence: formula sheet

Key formulas

Assertions about classes of transactions and events

Occurrence, Completeness, Accuracy, Cut-off, Classification

Used for the income statement and period transactions.

Assertions about account balances at period end

Existence, Rights and obligations, Completeness, Accuracy/valuation and allocation, Classification

Used for the statement of financial position.

Assertions about presentation and disclosure

Occurrence and rights and obligations, Completeness, Classification and understandability, Accuracy and valuation

Used for notes and how items are presented.

Direction of testing

Occurrence/existence → usually overstatement; Completeness → usually understatement

The direction depends on the scenario incentives. Management may, for example, overstate liabilities to smooth profits. Use this to choose the starting point of a test (ledger to document, or document to ledger).

Test direction rule

Existence: ledger → physical item or document. Completeness: document or physical item → ledger

Getting the direction wrong loses marks in procedure answers. Analytical procedures can also give evidence on completeness.

Sufficient appropriate evidence

Sufficient (quantity) + Appropriate (quality = relevance + reliability)

Both are needed. Say both words in every answer.

Link to risk

Higher assessed risk → more evidence needed; better quality evidence → less needed

Quantity needed depends on risk and quality. Quality cannot be replaced by quantity.

Reliability of evidence: general guide

More reliable: external > internal; direct > indirect; documents > oral; originals > copies; internal evidence from strong controls > from weak controls

These are general guides, not absolute rules. Exceptions exist, for example an external document of doubtful origin.

Seven procedures

Inspection, Observation, External confirmation, Recalculation, Reperformance, Analytical procedures, Inquiry

Learn the list. Each can be used in tests of controls or substantive procedures.

Good procedure sentence

Verb + specific item + source/document + what you are checking (assertion)

Example: Inspect the title deed to confirm the entity owns the building (rights and obligations).

Control test vs substantive

Tests of controls = did the control operate? Substantive = is the figure right?

Tests of controls address control risk. Substantive procedures address risk of material misstatement in the figures.

Direction of testing

Existence/occurrence: from the ledger or records to supporting documents or the physical asset. Completeness: from independent sources or documents to the ledger.

Pick the starting point that fits the assertion.

Inventory count attendance (ISA 501)

Material inventory → attend the count, unless impracticable → otherwise perform alternative procedures

If attendance is impracticable and no alternative gives enough evidence, you consider a modified opinion.

Direction of count tests

Floor → list = existence; List → floor = completeness

State both directions in answers.

Confirmation follow-up

No reply → follow up → alternative procedures

Examples of alternatives: subsequent cash receipts and dispatch documents.

Responding to estimates (ISA 540)

Test method, data and assumptions OR use own estimate/range OR review later events OR test controls

Choice depends on assessed risk.

Reliability of evidence

External > internal with strong controls > internal with weak controls; original > copy; written > oral

Use this to justify why one procedure beats another.

Documentation test (ISA 230)

Working papers must let an experienced auditor understand procedures, evidence and conclusions

Include who performed and reviewed the work, and when.

Quick revision

• Assertions are management's claims; audit evidence tests them.
• Transaction assertions include occurrence, completeness, accuracy, cut-off and classification.
• Balance assertions include existence, rights and obligations, completeness and valuation and allocation.
• Disclosure assertions cover occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.
• Sufficient is about quantity; appropriate is about quality, meaning relevance and reliability.
• External evidence is generally more reliable than internal; original documents more than copies.
• Procedures: inspection, observation, external confirmation, recalculation, reperformance, analytical procedures, enquiry.
• Enquiry alone is not enough evidence; corroborate it.
• Existence: test from the ledger to the physical item. Completeness: test from the item to the ledger.
• Sampling risk is the risk that the sample conclusion differs from testing the whole population.
• For estimates, review the method, assumptions and data, and compare with later events.
• Write each procedure with its purpose, linked to an assertion.

Common mistakes

• Using existence for an income statement item such as sales. Fix: Existence is a balance assertion. For sales, the matching assertion is occurrence.
• Treating existence and rights and obligations as the same. Fix: Existence is whether it is there. Rights is whether it is the entity's. Use the example of goods held on consignment, assets subject to a legal charge, or goods sold but still recorded in inventory.
• Using sufficient and appropriate as if they mean the same thing. Fix: Sufficient is quantity. Appropriate is quality. Define each in one line in your answer.
• Saying that more evidence can make up for unreliable evidence. Fix: State that quantity cannot compensate for poor quality. The auditor needs better evidence, not just more.
• Writing vague procedures such as 'check the invoices'. Fix: State the document, what it is compared to and the purpose. For example, agree the sales invoice to the despatch note and ledger to confirm occurrence.
• Confusing reperformance with recalculation. Fix: Recalculation checks arithmetic. Reperformance repeats a control or procedure the client carried out, such as a reconciliation or matching process.
• Listing general audit procedures instead of ones for the specific item. Fix: Tie every procedure to the named balance and assertion in the scenario.
• Saying a receivables confirmation proves the debt is recoverable. Fix: Say it mainly supports existence. Test valuation through post year-end cash receipts and ageing review.

Exam tips

• Always name the assertion in your answer. Markers give credit for the link between risk, assertion and procedure.
• Use the correct assertion set. Occurrence and cut-off apply to transactions. Existence and rights apply to balances.
• In objective questions, check the direction first. Overstatement usually points to occurrence or existence, understatement to completeness, but check the scenario incentives.
• In written answers, give procedures that state the document and the direction of test. Avoid one-word procedures.
• Read scenario hints: incentive to inflate profit, consignment stock, year-end timing or estimates all point to a specific assertion.
• In written answers, always use both words: say whether evidence is sufficient and whether it is appropriate, and explain each.
• For reliability questions, name the exact factor, such as external versus internal or original versus copy, rather than just saying it is more reliable.
• In OT questions, check relevance to the assertion before choosing the most reliable source. The most reliable evidence may not address the assertion.