Definition
SAS 145 defines the term in AU-C 315. An assertion is relevant when a misstatement in it is reasonably possible and would be material. Whether an assertion is relevant is decided before considering controls, based on the nature of the item and its inherent risk factors. A significant class of transactions, balance or disclosure is one with at least one relevant assertion.
Why it matters in an audit or review
Relevance determines the scope of further work. AU-C 330 requires substantive procedures for relevant assertions of significant classes of transactions, account balances and disclosures, whatever the assessed risk. An assertion judged not relevant needs no specific procedures, and the file should show why. Getting the list wrong either wastes time or leaves risks untested.
Example
For a $3 million prepaid expenses balance (illustrative), the auditor concludes that existence and valuation are relevant, because contracts could be cancelled or expired, but that rights is not, since all items are insurance and subscriptions in the entity's name. Procedures then target existence and valuation, and the file records why rights was excluded.
Common mistakes
- Marking every assertion relevant for every account to be safe.
- Dropping one by reference to controls, rather than to inherent risk.
- Not revisiting relevance after a change in the business.
FAQ
Is a relevant assertion the same as a significant risk?
No. A significant risk is a higher-end risk of material misstatement. Relevance only says there is some reasonable possibility.
Sources
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (as revised by SAS No. 145) (definitions of relevant assertion and significant class of transactions, account balance or disclosure)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
- AICPA, Statement on Auditing Standards No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error