Question

During the audit of LAX Sticks, auditors found $10,000, which had been erroneously recorded as miscellaneous expense instead of fixed assets. Which assertion is most likely affected?

1) Cutoff
2) Classification
3) Rights and obligations
4) Accuracy

Answer 1

The classification assertion is most affected by the $10,000 erroneously recorded as an expense instead of a fixed asset. This misclassification impacts the quality of the financial statements by misrepresenting the company's assets and expenses.

Step-by-step explanation:

During the audit of LAX Sticks, the classification assertion is most likely affected by the erroneous recording of $10,000 as miscellaneous expense instead of fixed assets.

The classification assertion ensures that transactions are recorded in the proper accounts. In this scenario, classifying a fixed asset purchase as an expense affects the quality and accuracy of the financial statements, as it misrepresents both the company's assets and expenses for the period. Fixed assets are long-term resources used in the operation of a business, whereas expenses are outflows of resources during the period. Therefore, the incorrect classification would not present a true and fair view of the company's financial position and results of operations.

Cutoff, rights and obligations, and accuracy are also important assertions, but they are not directly impacted by this particular misclassification issue. Cutoff deals with transactions being recorded in the correct accounting period, rights and obligations concern the ownership and legal rights associated with assets and liabilities, and accuracy involves the correct amount being recorded for each transaction.