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. The key word is control, 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 for rights and obligations comes from legal and contractual sources: title deeds, lease agreements, share certificates, loan agreements, and legal counsel confirmations. ISA 505 external confirmations are particularly relevant when the auditor needs to verify ownership or encumbrance directly with third parties — banks, custodians, legal counterparties, or consignment partners.
The assertion works in two directions. For assets, the question is: does the client own or control this item? For liabilities, the question is: 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 inventory held on consignment 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.
- A recorded asset with no right overstates net assets. Consignment stock, pledged deposits, and factored receivables are common items where possession does not equal ownership.
- Highest risk in leases, consignment, factoring, and pledged deposits. These arrangements create a gap between physical custody and legal or economic ownership.
- Inspectors flag missing ownership evidence. Regulators expect more than a fixed asset register — they want to see title deeds, contracts, and third-party confirmations.
Why it matters in practice
The FRC has found that audit teams frequently accept the fixed asset register as sufficient evidence for property, plant, and equipment 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, land registry records, or vehicle registration documents. 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.
Teams also routinely skip rights and obligations testing on cash and bank balances, assuming that a bank confirmation covers all assertions. But a bank confirmation confirms the balance exists (existence) and confirms the amount (accuracy/valuation) — it does not necessarily confirm that the cash is freely available. Pledged deposits, escrow accounts, and restricted cash balances may be confirmed by the bank at their full amount while being legally restricted or pledged as collateral. The auditor needs to read the underlying agreements to assess whether the entity has unrestricted access to the funds.
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), pledged deposits (restricted access), and complex financing arrangements where legal title differs from economic substance.
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).