Audit and Assurance Practice Exam

Which assertion might be more relevant if a client has an incentive to overstate revenue?

1. Completeness assertion.

2. Existence assertion.

3. Valuation assertion.

4. Disclosure assertion.

The correct answer is: Existence assertion.

The existence assertion is particularly relevant when a client has an incentive to overstate revenue because it focuses on whether the recorded revenues and associated transactions actually occurred during the reporting period. This assertion is critical since overstatement of revenue typically implies that the organization may be recognizing revenue from transactions that did not actually happen, often driven by pressures to present a stronger financial position. When a company has an incentive, such as meeting earnings targets, attracting investors, or improving stock prices, its management may be more prone to inflate reported revenues. Consequently, auditors pay close attention to the existence of these revenues to ensure that they are not just theoretical or fictitious, but rather represent real transactions backed by valid supporting documentation. While the completeness assertion relates to ensuring all revenues that should be recorded are actually captured, and the valuation assertion focuses on whether revenue is measured accurately according to applicable accounting standards, the existence assertion directly addresses the reality of the reported figures in cases of potential revenue overstatement. The disclosure assertion, on the other hand, pertains to how well the financial information is communicated but does not specifically tackle the concern of overstated revenues.