In this topic 9 sections
- 26Convert a possible misstatement into a precise claim
- 27Assertions about transactions, events and related disclosures
- 28Assertions about balances and related disclosures
- 29Let the assertion determine the direction of testing
- 30Materiality reflects users and context
- 31Keep the materiality amounts distinct
- 32Choose a benchmark, then justify the percentage
- 33Revisit materiality when the facts change
- 34Sources and further reading
Convert a possible misstatement into a precise claim
Management makes explicit or implicit assertions through the statements. Recording a receivable claims it exists, belongs to the entity and is appropriately measured and presented; the reported receivables must also be complete. Assertions identify how information could be wrong and which evidence is relevant.
Start with the potential misstatement, identify the transaction or balance affected, then choose the assertion and explain the connection. Several assertions may be affected, but listing every assertion without reasoning does not demonstrate understanding. An assertion used in planning is also different from a written representation obtained from management.
Assertions about transactions, events and related disclosures
| Assertion | Diagnostic question | Short illustration |
|---|---|---|
| Occurrence | Did the reported activity happen and relate to this entity? | A service charge appears without any service being delivered. |
| Completeness | Has all reportable activity been included? | Completed maintenance jobs never reach billing records. |
| Accuracy | Are amounts and other reported details correct? | Hours are multiplied by an outdated hourly rate. |
| Cutoff | Is the activity in the correct period? | July work is recorded as June revenue. |
| Classification | Is the activity recorded in the appropriate account? | Routine servicing is charged to equipment additions. |
| Presentation | Is the information appropriately grouped, described and understandable? | Material categories of revenue are obscured within one unclear caption. |
Concept sources: ASA 315, December 2022, A190 — original diagnostic questions and examples.
Assertions about balances and related disclosures
| Assertion | Diagnostic question | Short illustration |
|---|---|---|
| Existence | Is the reported asset, liability or equity interest real at period-end? | A scrapped testing instrument remains in the asset register. |
| Rights and obligations | Does the entity hold or control the asset rights, or owe the liability? | Customer-owned instruments are mixed into the entity's equipment balance. |
| Completeness | Are all required balances and disclosures included? | An unpaid contractor invoice is missing from liabilities. |
| Accuracy, valuation and allocation | Is the amount appropriate, including estimates and adjustments? | An instrument's useful life no longer reflects its expected use. |
| Classification | Is the balance placed in the correct category? | A liability due soon is incorrectly classified as non-current. |
| Presentation | Is the balance and related information clearly and appropriately disclosed? | A significant restriction on asset use is omitted from the notes. |
Concept sources: ASA 315, A190 — original balance-assertion comparison.
Occurrence relates to activity during the period; existence relates to balances at a date. Completeness applies to both. Disclosure matters are part of these assertion categories, rather than an optional extra after testing the numbers.
Let the assertion determine the direction of testing
To investigate overstatement, start with a recorded item and seek evidence supporting it. To investigate omissions, begin with an independent source or underlying activity and trace it into the records. Testing only recorded liabilities may miss the very liabilities that were never recorded. Accuracy and valuation require more than establishing existence: a real receivable may still be impaired.
Cutoff can affect several balances and transactions. Apply recognition rules and contractual facts; invoice dates alone may mislead. Rights and obligations concern control and enforceable rights, beyond physical possession. Legal ownership is not a universal recognition test; pledging an asset does not automatically remove it from the statements. Consider the framework and disclosure.
- Explain how the statements could be wrong
- Identify the affected item
- Select and justify the assertion
- Choose evidence that addresses that claim
- Evaluate the result
Concept sources: ASA 315, assertions — original application sequence.
Materiality reflects users and context
Materiality concerns information that could reasonably influence users' economic decisions, individually or together with other misstatements. Consider amount, nature and circumstances. It is used in planning, performing work, evaluating identified and uncorrected misstatements, and forming the opinion. It is not merely a year-end reporting calculation.
A small misstatement may matter if it masks a loan-covenant breach, changes a reported trend or concerns a sensitive related-party disclosure. Specific disclosure requirements also need attention. Neither a small dollar amount nor a clean total guarantees adequate presentation.
Concept sources: ASA 320, December 2023 — materiality in context and throughout the audit.
Keep the materiality amounts distinct
| Amount | Purpose | What it does not mean |
|---|---|---|
| Overall materiality | Assess materiality for the statements as a whole. | Every smaller misstatement is harmless. |
| Materiality for a particular class, balance or disclosure | Address matters for which a smaller misstatement could influence users. | Every account automatically needs a separate threshold. |
| Performance materiality | Set a lower working amount to reduce the chance that uncorrected and undetected misstatements together exceed the relevant materiality. | Test only items larger than this amount. |
Concept sources: ASA 320, determining and applying materiality — original purpose-and-limitation comparison.
Performance materiality reflects aggregation risk. Its determination considers knowledge of the entity, past errors and expectations about current misstatements. It is not a fixed percentage prescribed by the standard and is not the same as an amount below which differences need not be accumulated. Procedures must still address the relevant population and risk.
Choose a benchmark, then justify the percentage
| Entity circumstances | Benchmark worth considering | Question before using it |
|---|---|---|
| Established profit-seeking business | Profit before tax | Is profit representative and sufficiently stable? |
| Thin or volatile margins | Revenue or gross profit | Does the alternative better reflect user attention? |
| Service charity | Expenditure or revenue | Which measure best represents the activity users assess? |
| Investment or asset-focused entity | Equity, net assets or total assets | Which measure reflects the relevant financial interest? |
Concept sources: ASA 320, application guidance on benchmarks — original selection questions.
The guide gives practice illustrations of 5–10% of profit before tax and 0.5–1% of revenue or assets. These are study illustrations, not mandatory bands or automatic answers. Different benchmarks may produce very different figures. Explain relevance, stability and the selected percentage; avoid mechanically averaging unrelated amounts.
Revisit materiality when the facts change
Determine materiality when establishing the strategy and use performance materiality in assessing risk and planning further procedures. If new information would have changed the original amount, revise it and consider consequences for performance materiality and work already performed or planned. A lower threshold generally demands more evidence, but its amount and quality also depend on risk and the procedure.
Record the chosen amounts, basis, significant judgements and revisions. At completion, evaluate the actual misstatements with their qualitative features and cumulative effect. The reporting decision depends on correction, materiality, pervasiveness and available evidence; crossing a planning number does not mechanically determine the opinion. ASA 450, May 2017 compilation.
Sources and further reading
- ASA 315, December 2022 — assertions and their use in assessing risk.
- ASA 320, December 2023 — materiality and performance materiality.
- ASA 450, May 2017 compilation — evaluation of identified and uncorrected misstatements.