CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is performing substantive procedures on a client's property, plant, and equipment (PP&E) balance. The auditor selects a sample of additions recorded during the year and examines supporting documentation, such as vendor invoices, receiving reports, and authorization forms. Which assertion is the auditor primarily testing with this procedure?
- AExistence
- BCompleteness
- CRights and Obligations
- DValuation and Allocation
Show answer & explanationAnswer & explanation
Correct answer: A. Existence
Vouching from the accounting records (recorded PP&E additions) back to supporting documentation (invoices, receiving reports) is a primary test for the existence assertion. This procedure aims to ensure that recorded assets actually exist and are properly supported.
Why the other options are wrong
- B. Completeness would involve tracing from source documents (e.g., contracts for new assets) to the accounting records.
- C. Rights and obligations would involve examining title documents, purchase agreements, and lease contracts.
- D. Valuation and allocation would involve examining the cost components, depreciation calculations, and impairment assessments.
Existence Assertion (PP&E)
The existence assertion for property, plant, and equipment (PP&E) states that recorded assets actually exist at the balance sheet date. This is typically tested by vouching from the accounting records to supporting documentation or by physically inspecting assets.
- Tests for existence typically involve vouching from the accounting records back to source documents.
- Physical inspection of assets is also a strong test of existence.
- A common risk for existence is fictitious assets or assets that have been disposed of but not removed from records.
Memory trick: EXISTENCE means the RECORDED things are REALLY THERE.