Significant classes, balances, disclosures and relevant assertions

In this lesson you will

Determine whether an assertion is relevant using the AU-C 315.12 definition.
Identify significant classes of transactions, account balances and disclosures.
Explain the link between significance and the substantive procedures required by AU-C 330.18.

Definitions first

AU-C 315.12 defines:

Relevant assertion. An assertion about a class of transactions, account balance or disclosure that has an identified risk of material misstatement. A risk exists when there is a reasonable possibility of a misstatement occurring and a reasonable possibility that it would be material. The determination is based on inherent risk, before controls.
Significant class of transactions, account balance or disclosure. One that has one or more relevant assertions.

The logic runs in one direction: identify risks, which identify relevant assertions, which make the item significant (AU-C 315.A216). An account is not significant because it is big. It is significant because it has a relevant assertion. Size matters through magnitude, but a large, simple, well-understood balance can have few relevant assertions.

The requirement

AU-C 315.33 requires you to determine the relevant assertions and the related significant classes, balances and disclosures. AU-C 315.32 first requires identifying risks and whether they exist at the financial statement level or the assertion level.

Applying "reasonable possibility"

The bar is a reasonable possibility, not a remote one, of a misstatement that could be material. For each material line item and disclosure, ask by assertion:

Could this assertion be misstated? Consider the inherent risk factors.
If it were, could the misstatement be material, alone or with others?

If both answers are yes, the assertion is relevant. Do not mark every assertion relevant by default. That dilutes the analysis and leads to procedures that do not address real risks.

Examples:

Cash at a small entity with two bank accounts: existence and completeness may be relevant if cash is material, while classification may not.
Fixed assets with no additions and straight-line depreciation: accuracy of depreciation may be relevant; existence may not be if assets are few and observable.
A debt footnote: presentation of covenants and maturities is often relevant even when the balance itself is simple.

Disclosures count. A going concern, related party or subsequent event disclosure can be a significant disclosure with its own relevant assertions.

Why it matters: the substantive floor

AU-C 330.18 requires substantive procedures for each relevant assertion of each significant class, balance and disclosure, regardless of the assessed level of control risk. This replaced the pre-SAS 145 language that tied the requirement to each material item. Your significance determination therefore sets the minimum substantive work.

AU-C 315.40 then adds a check. For material items you determined are not significant, evaluate whether that determination remains appropriate. The next lessons cover control risk and the stand-back.

Documentation

Show the analysis by line item and assertion: material or not, relevant assertions and the risk behind each, and the conclusion on significance. A significant accounts scoping matrix does this in one table.

Common findings

All assertions marked relevant for every account.
Significance decided by a percentage of materiality alone.
Disclosures omitted from the analysis.
Relevant assertions with no substantive procedure mapped to them.

A quick self-test before review: pick any material line item at random and ask a teammate to state its relevant assertions and the risk behind each from the file alone. If they cannot, the documentation does not yet meet AU-C 230.08.

Worked example

Scoping a balance sheet

Northgate Dental Lab, Inc. has materiality of $80,000. The team analyzes four items.

Item	Balance	Relevant assertions	Significant?
Cash	$640,000	Existence	Yes
Accounts receivable	$1,150,000	Existence, valuation	Yes
Prepaid expenses	$95,000	None	No
Lease liability	$1,900,000	Accuracy, valuation, presentation	Yes

Prepaid expenses are above materiality, $95,000 versus $80,000, but consist of three insurance policies paid annually and amortized monthly. The team sees no reasonable possibility of a misstatement that could be material, so no assertion is relevant and the balance is not significant. Under AU-C 315.40 the team documents why that determination remains appropriate and performs a simple analytic.

For the lease liability, a new 10-year lease commenced in April. Discount rate selection (subjectivity) and a renewal option judgment (uncertainty) make accuracy and valuation relevant. Presentation of the current portion and maturity table is also relevant. Each relevant assertion is mapped to a substantive procedure under AU-C 330.18.

Self-check

Answer each question before you open the answer.

What makes a class of transactions, account balance or disclosure significant under SAS 145?
Show answer
Having one or more relevant assertions, meaning one or more identified risks of material misstatement (AU-C 315.12).
Is relevance determined before or after considering controls?
Show answer
Before. The AU-C 315.12 definition of relevant assertion says the determination is made before consideration of any related controls, based on inherent risk.
A material balance has no relevant assertions. What does AU-C 315.40 require?
Show answer
Evaluate whether the determination that it is not significant remains appropriate. Document the basis.
Why does the significance determination matter for substantive testing?
Show answer
AU-C 330.18 requires substantive procedures for each relevant assertion of each significant item regardless of control risk, so the determination sets the minimum substantive work.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error