Audit and Assurance Practice Exam

Which of the following statements is true regarding assertions in the revenue cycle?

1. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness.

2. A fictitious sales assertion could easily be ignored.

3. Completeness is the most relevant assertion when incentive to understate revenue exists.

4. Assertions in the revenue cycle are irrelevant to fraud risk.

The correct answer is: If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness.

The statement regarding assertions in the revenue cycle that is true is that if a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion. This is because the existence assertion focuses on whether the recorded revenues actually occurred, while the completeness assertion ensures that all revenues that should have been recorded are included in the financial statements. When a client is motivated to overstate revenues, there is a risk that they might create fictitious sales or include revenues that didn’t actually occur. In such scenarios, the existence of those revenues becomes a critical area of concern, necessitating a thorough examination to verify that reported sales are legitimate. Hence, in an environment where overstating revenues is possible, auditors pay closer attention to the existence assertion, as ensuring that sales reported indeed took place is crucial for the accuracy of financial reporting. In contrast, while completeness is always an important assertion, in the context of an incentive to overstate revenue, the focus shifts primarily to validating the existence of recorded revenue.