What is the existence assertion?
The existence assertion is one of the assertions about account balances at period end defined in ISA 315.A190(a). When management presents a balance sheet showing inventory of EUR 5 million, they are implicitly claiming that inventory actually exists — that it is physically present or legally held at the reporting date. The auditor's job is to test whether that claim holds.
The defining feature of existence testing is the direction: you start from a recorded item in the financial statements and trace it to supporting evidence in the real world. Select a receivable from the ledger and confirm it with the customer. Select an inventory line and inspect it in the warehouse. Select an investment and verify the holding with the custodian. The direction is always ledger to evidence.
Existence testing is not limited to physical counts. ISA 501.4 covers inventory observation, and ISA 505 covers external confirmations for receivables and bank balances, but the assertion applies to any balance sheet item. For intangible assets, existence may involve inspecting contracts or licence agreements. For provisions, it may involve reviewing the underlying obligation. The procedure changes; the direction does not.
Key Points
- Existence asks one question: is this item real at the balance sheet date? It does not ask whether the amount is correct (valuation) or whether all items are recorded (completeness).
- The direction of testing runs from the financial statements to the evidence — select from the ledger, trace to supporting documentation or physical verification.
- Existence risk is highest for assets because management's incentive is to overstate assets. For liabilities, the incentive runs the other way, making completeness the dominant assertion.
- Confusing existence with completeness is the most common directional error. Testing from the ledger addresses existence. Testing into the ledger from external sources addresses completeness.
Why it matters in practice
The FRC has flagged files where teams claim to have tested existence but actually tested completeness — or vice versa. The most common example: sending a confirmation to a supplier to "confirm the payable exists." But if the supplier confirms the balance, that tells you the amount is correct. If the supplier does not respond, you know nothing. Neither outcome addresses the real risk on payables, which is completeness (unrecorded liabilities). The direction confusion wastes effort and leaves the actual risk untested.
For inventory, ISA 501.8 addresses the specific case where inventory is held by a third party. Physical inspection is not possible, so the auditor must obtain confirmation from the third party or perform alternative procedures. Teams sometimes skip this requirement when inventory is held at bonded warehouses, consignment locations, or external logistics providers — each of which requires separate existence evidence.
Key standard references
- ISA 315.A190(a): Existence as an assertion about account balances at period end.
- ISA 501.4-8: Attendance at physical inventory counting and inventory held by third parties.
- ISA 505: External confirmations as evidence for existence of receivables, bank balances, and other balances.
- ISA 500.A31: Directional testing — the relationship between the direction of a test and the assertion it addresses.
Related terms
Related reading
Frequently asked questions
How does the direction of testing distinguish existence from completeness?
To test existence, you start with a recorded item in the financial statements and trace it to supporting evidence (ledger to real world). For completeness, you start from a source outside the ledger and check whether the item was recorded (real world to ledger). ISA 500.A31 explains this directional logic.
Is existence risk the same for assets and liabilities?
No. Existence risk is highest for assets because management has an incentive to overstate them. For liabilities, the incentive is to understate, making completeness the primary assertion. This is why existence testing focuses heavily on assets like inventory, receivables, and investments.
What procedures test the existence assertion?
Physical inspection (inventory counts per ISA 501.4), external confirmations (receivables per ISA 505), inspection of title deeds (property), inspection of share certificates (investments), and review of loan agreements (borrowings). The common thread is tracing from the ledger to independent evidence.