ACCA Advanced Audit and Assurance (AAA) Practice Exam

Substantive tests for rights and obligations typically involve which of the following?

1. Reviewing operational procedures

2. Cut-off testing

3. Confirmations with third parties

4. Internal compliance audits

The correct answer is: Confirmations with third parties

Substantive tests for rights and obligations focus on verifying the ownership and associated rights of assets and the validity of liabilities within the financial statements. Confirmations with third parties serve as a direct method to confirm these rights and obligations. For example, when an auditor sends confirmation requests to banks regarding bank balances, the bank can confirm that the client holds a particular account and the balance stated, thereby providing evidence of the client's rights over that asset. This approach is valuable as it provides independent and reliable evidence, which can strengthen the auditor's conclusion regarding the existence and completeness of rights and obligations on the balance sheet. It is also particularly important in areas such as accounts receivable and investments, where ownership confirmation is crucial for a proper audit opinion. Other options, while relevant in various contexts, do not directly address the verification of rights and obligations. Reviewing operational procedures can inform about the company’s processes but does not provide direct evidence concerning ownership. Cut-off testing primarily assesses whether transactions are recorded in the correct accounting period rather than confirming rights and obligations. Internal compliance audits focus on adherence to regulations and company policies, rather than substantiating the existence and completeness of rights or obligations as they relate to the financial statements.