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Homework answers / question archive / An audit risk is manifested when a material misstatement enters the financial reporting process (inherent risk) that the client’s internal controls do not prevent or detect (control risk) and that the auditors’ substantive procedures do not detect (detection risk)

An audit risk is manifested when a material misstatement enters the financial reporting process (inherent risk) that the client’s internal controls do not prevent or detect (control risk) and that the auditors’ substantive procedures do not detect (detection risk)

Accounting

An audit risk is manifested when a material misstatement enters the financial reporting process (inherent risk) that the client’s internal controls do not prevent or detect (control risk) and that the auditors’ substantive procedures do not detect (detection risk).

Because material mistakes happen, auditors need to examine eg. Revenue and accounts receivable for completeness. Auditors may assess inherent risk for some transaction assertions to be higher than others.

Required:

You must assess the Relative Assertion Risks is for Revenue and Receivables. Use and complete the worksheet given below, to assess the relative assertion risks for revenue and accounts receivable.

Tips:

List the assertions, rate using “High, Medium, Low” and give an explanation as to why you have rated it as such.

Relative Assertion Risk for Revenue and Accounts Receivable

AICPA Assertions

Revenues

Receivables

Explanation (why)

Transaction Assertions

  

1.Occurance

    

2.Completeness

    

3.Accuracy

    

4.Cut-off

    

5.Classification

    

Balance Assertions

  

1.Existence

    

2.Rights and obligation

    

3.Completeness

    

4.Accuracy, valuation and Allocation

    

Presentation and Disclosure Assertions

  

1.Accuracy

      

2.Completeness

      

3.Occurence

      

4.Rights and obligation

      

5.Understandibility

      

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  Revenue Receivables Why?
Transaction Assertions-      
Occurrence High Low Occurrence is important assertions for fraud risk. Balance sheet assertions are not affected because of transaction, hence low.
Completeness High Low Completeness and Cut-off are important for ensuring the true and fair revenue. Also, it addresses fraud risk. Balance sheet assertions are not affected because of transaction, hence low.
Accuracy Medium Low Accuracy is medium risk because Accuracy addresses true and fair presentation of financial statement and complexity of transactions.
Cut-off High Low Completeness and Cut-off are important for ensuring the true and fair revenue. Also, it addresses fraud risk. Balance sheet assertions are not affected because of transaction, hence low.
Classification Low Low Low risk as classification has no major implication. Balance sheet assertions are not affected because of transaction, hence low.
       
Balance Assertions-      
Existence Low High Existence is high because of fraud risk for Receivables. Balance level asertions does not affect PL item, hence low for Revenue.
Rights and Obligations Low Medium Risk for Receivables is Medium as Rights and Obligations are important for the proper understanding of financial statement. Balance level asertions does not affect PL item, hence low for Revenue.
Completeness Low Medium Balance level asertions does not affect PL item, hence low for Revenue. Completeness is Medium risk for Receivables as overstatement is a challenge.
Accuracy, Vauation and Allocation Low Medium Balance level asertions does not affect PL item, hence low for Revenue. Allowance understatement is a Medium risk as fraud can be perpetrated to ensure favorable balance.
       
Presentation and disclosure Assertions-      
Accuracy Low Low No risk involved
Completeness Medium Medium Entities often tend to present less dislosure about key transaction.
Occurrence Low Low No risk involved
Rights and Obligation Medium Medium Entities often tend to present less dislosure about key transaction, its rights and obligation.
Understandibility Low Low No risk involved

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