What does rights and obligations mean on the CPA exam?
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Rights and obligations. The assertion that the entity genuinely owns the assets it reports and genuinely owes the liabilities. Holding something is not the same as owning it.
Defined against AU-C 315.A219.
Worked example
A retailer's year-end inventory count totals $3,200,000. While reviewing agreements, the auditor finds that the count includes $180,000 of goods a supplier left on consignment, still owned by the supplier until sold. It also learns that goods costing the retailer $95,000 sit at a reseller on consignment and were not counted.
Which assertion does each item bear on, and by how much should inventory change?
| The consigned-in goods are held but not owned. Including them fails rights and obligations, so they come out.3,200,000 - 180,000 | 3,020,000 |
| The goods at the reseller are owned but not on hand. Leaving them out fails completeness, so they go in.3,020,000 + 95,000 | 3,115,000 |
| Net overstatement in the count as recorded180,000 - 95,000 | 85,000 |
Answer: Inventory should be $3,115,000, an $85,000 reduction. The supplier's goods fail rights and obligations; the goods at the reseller are a completeness problem.
The trap: Treating physical presence as ownership. A count proves the goods exist on the premises, not that the entity owns them, which is why the auditor reads consignment agreements and confirms terms with the other party.
Based on AU-C 315.A219.
Which CPA exam sections use rights and obligations?
Rights and obligations appears in the AUD section of the CPA exam.
Other terms defined against AU-C 315
- application controls: Controls built into one business process or system, such as a validity check on an input field or a three-way match.
- assessed risk: The auditor's judgment about the risk of material misstatement at the assertion level, combining inherent and control risk.
- control environment: The governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity's system of internal control.
- general controls: Controls over the IT environment as a whole -- access, change management, operations -- that everything else depends on.
- general IT control: A control over the entity's IT processes that supports the continued effective functioning of information-processing controls and the integrity of information.
- information and communication: One of the five components of internal control: how an entity obtains the information it needs and gets it to the people who have to act on it.
- information-processing control: A control over processing in an IT application or a manual information process that directly addresses a risk to the integrity of information.
- risk assessment procedures: The audit procedures designed and performed to identify and assess the risks of material misstatement at the financial statement and assertion levels.
Related terms
- balance sheet: A snapshot at one date of what the entity owns, what it owes, and the owners' residual.
- total liabilities: Everything the entity owes, added up.
- variable interest entity: An entity that cannot fund itself without further support, or whose equity holders lack the usual powers.