Final answer:
The auditor reviews bank confirmations for any liens on receivables to test the 'rights and obligations' assertion. This affirms whether the entity has the rights to the assets and the obligations of the entity are reported correctly. The focus is on establishing that the receivables are not encumbered and accurately reflected in the financial statements. The correct answer is option b. Rights and obligations.
Step-by-step explanation:
When an auditor is reviewing bank confirmations for any liens on receivables, they are primarily testing the rights and obligations assertion. This assertion relates to whether the entity has the rights to the assets it reports and whether any liabilities reported are the obligations of the entity. In the context of receivables, reviewing bank confirmations helps ensure that the entity truly has the right to the receivables and that they are not already promised or committed to another party as collateral, indicating a lien. If a lien is present, it might mean that the entity does not have full control over the related receivables, affecting the entity's rights to those assets.
For example, if the auditor discovers a lien on the receivables, they would take note that the related asset might not be as freely available to the entity as it would appear, hence questioning whether the business can rightfully claim those receivables as its own unencumbered assets. Understanding and verifying rights and obligations is crucial because it impacts the valuation and presentation of receivables on the financial statements. If the entity does not have full rights to the receivables due to the lien, then this could lead to a misstatement in the financial reports.
Other assertions like valuation and allocation relate to whether amounts have been recorded appropriately. Existence checks if the assets or liabilities are actually present at a given date, while completeness ensures all transactions and accounts that should be recorded have been recorded. Each assertion plays a pivotal role in an audit, but when it comes to liens on receivables, the rights and obligations assertion stands out as the primary focus of the auditor's assessment.