What is the rights and obligations assertion?
ISA 315 .A190(b)(ii) defines rights and obligations for account balances: the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Control is the operative word, not possession. An entity can physically hold an asset (inventory in its warehouse, cash in its bank account) without having the right to recognise it on its balance sheet.
Evidence comes from legal and contractual sources: title deeds, lease agreements, share certificates, and legal counsel confirmations. ISA 505 external confirmations matter most when the auditor needs to verify ownership or encumbrance directly with third parties (banks, custodians, consignment partners, or legal counterparties).
This assertion works in two directions. For assets, the question is: does the client own or control this item? For liabilities: is the client genuinely the obligor? A guarantee obligation recorded as a liability when the entity is not the guarantor fails rights and obligations just as much as consignment inventory that the entity does not own.
Key Points
- Tests ownership or control of balance sheet items. The entity must hold or control the rights to assets and be the genuine obligor for liabilities.
- Consignment stock, pledged deposits, factored receivables, and leased assets are common items where possession does not equal ownership. A recorded asset with no right overstates net assets.
- Inspectors expect more than a fixed asset register. They want to see title deeds, contracts, third-party confirmations, and lease agreements in the file.
Why it matters in practice
In our experience, teams frequently accept the fixed asset register as sufficient evidence for PP&E without independently corroborating ownership. A fixed asset register is an internal record that proves management has listed an asset. It does not prove the entity holds title. For material property items, the auditor should inspect title deeds and land registry records. For leased assets under IFRS 16 , the right-of-use asset must be supported by a lease agreement that confirms the entity has the right to use the underlying asset for the lease term. When the file tells the same story year after year (SALY), this step gets skipped first.
Cash and bank balances are another blind spot. Teams assume a bank confirmation covers all assertions, but a bank confirmation confirms the balance exists (existence) and confirms the amount (accuracy/valuation). It does not confirm that the cash is freely available. Pledged deposits, escrow accounts, restricted cash balances, and collateralised funds may all be confirmed by the bank at their full amount while being legally restricted. Reading the underlying agreements is the only way to assess whether the entity has unrestricted access.
Getting rights and obligations wrong is uncomfortable because the error often sits in plain sight. The asset is real, the number is right, and nobody questions whether the client actually owns it until an inspector asks for the title deed and the file has nothing.
Key standard references
- ISA 315 .A190(b)(ii): Rights and obligations assertion for account balances. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
- ISA 315 .A190(c)(i): Occurrence and rights and obligations assertion for disclosures. Disclosed events have occurred and pertain to the entity.
- ISA 500 .A26: Reliability of audit evidence based on its source and nature (external vs. internal).
- ISA 505 : External confirmations as a means of obtaining audit evidence about account balances and their attributes.
Related terms
Related reading
Frequently asked questions
What does rights and obligations test?
It tests whether the entity actually owns or controls assets on its balance sheet and is the genuine obligor for recorded liabilities. A warehouse of goods proves nothing if half the inventory is held on consignment for a third party. ISA 315.A190(b)(ii) frames it as control, not just possession.
What are the highest-risk areas for this assertion?
Lease arrangements (title stays with lessor), consignment stock (goods held but not owned), factored receivables (ownership transferred), and pledged deposits (restricted access). Each creates a gap between physical custody and legal or economic ownership.
How does this differ from the existence assertion?
Existence asks whether the asset is real and physically or legally exists. Rights and obligations assumes the asset exists and asks whether the client owns or controls it. Inventory can satisfy existence (counted, confirmed) and fail rights and obligations (goods belong to a third party on consignment).