Efficient Tests of Balances Series--No. 4: Understanding Financial Statement Assertions

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Assertions are representations of management that are embodied in all financial statement components or classifications.  Specific audit objectives are developed in each audit area to evaluate the appropriateness and reasonableness of relevant financial statement assertions.  Auditing procedures are performed in each audit area to accomplish the audit objectives. From SAS No. 106, Audit Evidence, the assertions are:

For classes of transactions and events:

1.    Occurrence—All transactions and events that have been recorded have occurred and pertain to the entity.
2.    Completeness—All transactions and events that should have been recorded have been recorded.
3.    Accuracy—Amounts and other data relating to recorded transactions and events have been recorded appropriately.
4.    Cutoff—Transactions and events have been recorded in the correct accounting period.
5.    Classification—Transactions and events have been recorded in the proper accounts.

For account balances at the period end:

1.    Existence—Assets, liabilities and equity interests exist.
2.    Rights and Obligations—The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
3.    Completeness—All assets, liabilities, and equity interests that should have been recorded have been recorded.
4.    Valuation and allocation—Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

For presentation and disclosure:

1.    Occurrence and Rights and Obligations—Disclosed events and transactions have occurred and pertain to the entity.
2.    Completeness—All disclosures that should have been included in the financial statements have been included.
3.    Classification and Understandability—Financial information is appropriately presented and described and disclosures are clearly expressed.
4.    Accuracy and Valuation—Financial and other information are disclosed fairly and at appropriate amounts.

Here is an easy way to remember relevant assertions for transactions, balances and disclosures:

    C  ompleteness
        To determine that all transactions and accounts that should be presented
        have been included in the financial statements.

    O  ccurrence and cutoff
        To determine that all transactions occurring during the period have been
        recorded in the financial statements in the proper period.

    V  aluation and accuracy
        To determine that all asset, liability, revenue and expense components
        have been included in the financial statements at accurate amounts,  classified properly.

    E  xistence
        To determine that all recorded assets and liabilities exist at a given

    R  ights
        To determine that the entity has rights to all assets recorded at a given date.

    O  bligations
        To determine that all liabilities are obligations of the entity at a given date.

    D  isclosure and Presentation
        To determine that all components of the financial statements and other transactions and events are accurately classified,                 clearly described and disclosed.

Audit programs from most firms’ accounting and auditing manuals are designed in a standard, all-inclusive format.  That is, most conceivable auditing procedures have been included.  To ensure we evaluate all applicable financial statement assertions, the auditor must consider relevant assertions during the risk assessment process and when designing and modifying programs.  Failure to eliminate certain unnecessary procedures may result in overauditing.  Eliminating other procedures without considering the relevant assertions applicable to each account balance could result in collecting insufficient evidence.  Eliminating all tests of controls, for example, without adding other analytical or tests of balances procedures, may omit procedures for verifying the completeness assertion for revenue.

For live and on-demand webcasts on modifying audit programs to enable auditors to evaluate relevant financial statement assertions, click on the applicable box on the left side of my home page, www.cpafirmsupport.com.


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