[Anonymous]

When testing management assertions for individual accounts (Cash, Inventory, etc.), there are a number of different approaches that can be done as far as the testing them. If you’re testing account balances of balance sheet accounts apparently the approach used is to to consider the following four assertions: Rights and Obligations, Allocation/Valuation, Completeness, Existence (mnemonic: R*A*C*E).

But my question is, don’t you pretty much need to do testing for the rest of these as well? At least, those applicable to the particular account/balance you’re testing? Some other familiar assertions include Cutoff, Classification, Accuracy, Presentation/Disclosure. There are some other “approaches” that are apparently used too where more of them are used.

I’m not quite sure how these things are tested on the exam and what approach(es), i.e., the R*A*C*E approach mentioned here, you have to know.

I know this is probably a semi-confusing question but if anyone has any insight, I’d like to hear it. I also asked this on Roger’s homework section too but haven’t gotten a reply yet so thought I’d run it up the flagpole here.

[ruggercpa2b]

I am not sure I follow your question. Are you saying why for Account Balances its only RACE that you would test but not all other assertions?

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[Anonymous]

@ruggercpa2b – yes. Also, I'm trying to determine when to test more of the other assertions (i.e., not for account balances but for something else.)

[Substantive Testing]

Not all assertions are applicable for every financial statement item you are testing. For example, cash you do not test for presentation/disclosure because that is only applicable to loans and commitments. I recommend you to be familiar with each balance sheet and income statement account and what audit assertions are applicable to each.

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[Anonymous]

@Substantial Assurance – that is good advice. But actually I am glad you mentioned Cash because apparently there is a potential thing to test for Presentation/Disclosure (see below.)

Ok, let me give an example – let's use Cash. This is actually from Roger's textbook.

RACE Approach for Cash (account balance testings only, I'm assuming):

Rights & Obligations – bank confirmations to identify restrictions on cash.
Allocation & Valuation – bank confirmations to verify bank balance
Completeness – perform analytical procedures to determine if amounts and volume of transactions match expectations
Existence – bank confirmations to confirm balances (and presumably to just confirm that the accounts even exist in the same bank where client claims they exist!)

PERCV Approach for Cash:

Presentation & Disclosure – review disclosures for GAAP complce; inquire about compensating balances
Existence & Occurrence – count the cash on hand
Rights & Obligations – Review receipts and disbursements
Completeness/Cutoff – Review bank rec
Valuation/Accuracy/Allocation – Reconcile summary schedules to general ledger

My question is WHEN to use a particular approach. The RACE approach is recommended (by Roger, anyway) for testing account balances. But, in what circumstances would I NOT use that approach and use another one instead?

Thanks in advance for helping me with this.

[Substantive Testing]

You do not need to go in too in-depth for the test, but I do know the answer for that just because I am an auditor.
There are things called audit programs and they are a list of procedures/balances to be tested in order to support the auditor's conclusion. Now, this audit program could be extremely long if your internal controls/detail testing went wrong and there were many problems/exceptions leading to higher risk assessment for some balance sheet/Income statement accounts. Then your audit programs will cover some more assertions testings like testings for cutoff and classification for cash. But if we are talking about a regular cash audit ( most likely low risk cash), we go by just RACE.

AUD - 75
BEC - 75
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CPA ex-auditor

 

[Anonymous]

@Substantive – ok so you use RACE for testing account balances usually, is that right? Or do you use some other ones? And which ones do you use when you're not testing account balances?

Gleim's review course has one called the ‘CAVE CROC'
(Completeness, Accuracy, Valuation/allocation, Existence ; Cutoff, Rights/obligations, Occurrence, Classification/understandability.)
I don't know when some of those other non-RACE ones would apply. I guess for some accounts, we would not need to test a Cutoff, for instance – like maybe for stockholders' equity.
Obviously we have those balances at the end of the year but the transactions involving those are all very predictable and if 12/31 is our year-end, we would not be looking at anything in-transit after that date like we would be for cash, AR, AP, Inventory, etc.

As you can tell, I have never done auditing.

[Substantive Testing]

Like I mentioned, every account has different assertions that have to be tested. Cash usually do not need to be tested for cutoff, but AP has to ALWAYS be tested for cutoff regardless of risk assessment. My 2 cents, get familiar with the balance sheet/Income statement accounts and the assertions that must be tested for each.

AUD - 75
BEC - 75
FAR - 81
REG - 78

 

CPA ex-auditor

 

[Anonymous]

Ok. I guess my confusion is over the fact that Roger's book seems to indicate that every class of accounts usually has to be tested for all assertions. I agree with what you are saying, based upon common sense, that not all need to be tested depending on what they are. When two sources of information that both seem reliable, give different information, then that's when it becomes confusing.

[ruggercpa2b]

I think you may be interpreting the book wrong. In Roger's book he lists all assertions as more of an introductory thing. And then he breaks it down by Classes of Transactions, Account Balances and Presentation & Disclosure.

At least this is what my book is showing under the Audit Evidence Chapter.

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AUD - 73, 72 retake 7/2/2016
BEC - 8/20/2016
REG - TBD
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I am so ready for this nightmare to be over. Been at this way too long.

[Anonymous]

Yes! He does break it down using the RACE and PERCV approaches for each class of transaction. My question is, which one of these approaches should I be focusing on? Or do I need to know both of them? I know, in the videos he says don't even try to memorize what you have to do for each assertion for each class of transactions. But, as you can see, he lists different things for RACE and different things for U-PERCV, as I posted in an earlier post. Here's an example:

Pages 4-19 and 4-20:

Rights and Obligations (under RACE): Accounts receivable confirmations; Tracing receivables to documentation of sales transactions.

Rights and Obligations (under PERCV): Review cutoffs; inquire about factoring of receivables.

Alright, so this leads to the obvious question of why Rights and Obligations under RACE are somehow quite different from those under PERCV. WHY??

[ruggercpa2b]

You do need to know if you were given a balance sheet account what the assertion should be. So the breakdown under each is what you need to know. And then as you answer questions when you know its a balance sheet account then you know that the tests are RACE and that should help you in narrowing down the answer choices and then getting to the right answer. Hope this helps. Assertions are my worst nightmare.

AUD - NINJA in Training
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AUD - 1/6/18
FAR - TBD
REG - TBD
BEC - TBD

AUD - 73, 72 retake 7/2/2016
BEC - 8/20/2016
REG - TBD
FAR - TBD

I am so ready for this nightmare to be over. Been at this way too long.

[Anonymous]

Ighhhh, that sounds like a real pain in the ass! No wonder the failure rates of AUD and FAR are similar, even though AUD is easier.

I haven't worked any problems on this topic yet, but I do now seem to remember when I took Financial Auditing years ago, there were “pick the right assertion” questions, and somehow I always picked the wrong one.

I'm in for a long haul with this. Thanks though!

[mooseonloose]

I am right with you @crazy. My exam in in less than three weeks and I still have no clue on assertions.

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[Anonymous]

Ha!! Well, I'm sure glad I'm not alone on this particular topic! How quickly I forgot what I learned from Financial Accounting, taken 2-3 years ago now. Ighh! Eventually I'll understand it but I am going to have to figure out the best way to learn it for myself.

[Author]

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