Assignment3 09/06/2021 20:5:51 Page 13

ASSIGNMENT 3

Assertions
Learning objective
In this assignment, you will extend your knowledge gained in assignment 1 by taking the
significant risks you have already identified and then conducting further analysis on their
likelihood and materiality.
Risks identified from gaining an understanding of the client’s business are referred to as
inherent risks. These risks are considered in the audit-risk formula. The auditor needs to
identify which financial statement assertions may be affected by these inherent risks.
Identifying these risks will help determine the nature of the audit procedures to be performed.
Management implicitly or explicitly makes assertions regarding the recognition,
measurement, and presentation of the various elements of the financial statements and related
disclosures. Auditors use assertions for account balances to form a basis for the assessment of
risks of material misstatement. That is, assertions are used to identify the types of errors that
could occur in transactions that result in the account balances. Consequently, breaking down
the financial statement accounts into these assertions will direct the audit effort to those areas
of higher risk.
Assertions direct the audit, and audit procedures are designed so that they are responsive to
the assessed risks. Broadly, these assertions can be classified in the following categories:
• existence or occurrence
• completeness
• valuation and allocation, or accuracy
• rights and obligations
• cut-off
• classification
• presentation, disclosure, and understandability

Required
Using the risks identified in assignment 1 on working paper A1–1, complete the following
information in the relevant columns of the working paper.
• Identify the assertions that would be affected.
• Give an assessment of “high,” “medium,” or “low” in relation to the likelihood and
materiality of the risk occurring.
A risk should be classified as “high” if it is highly likely to be present and material. A risk
should be classified as “medium” if it may be present and material. Risks should be classified
as “low” if they are unlikely to be present and/or not material.

Discussion points
• Did you have any significant risks that could not be linked to an account in the financial
statements and an assertion? Is it still a significant risk?
• Given your analysis—for this client—is the overall level of inherent risk “low,” “medium,”
or “high”?

Assignment 3 13