Which of the following is a management assertion made about the valuation and allocation of long
Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements (management) is making to its users. These assertions are relevant to auditors performing a financial statement audit in two ways. First, the objective of a financial statement audit is to obtain sufficient appropriate audit evidence to conclude on whether the financial statements present fairly, in all material respects, the financial position of a company and the results of its operations and cash flows.[1] In developing that conclusion, the auditor evaluates whether audit evidence corroborates or contradicts financial statement assertions.[2] Second, auditors are required to consider the risk of material misstatement through understanding the entity and its environment, including the entity's internal control.[3][4] Financial statement assertions provide a framework to assess the risk of material misstatement in each significant account balance or class of transactions.[5] Show
Both United States and International auditing standards include guidance related to financial statement assertions, although the specific assertions differ. The PCAOB and the IFAC address this topic in AS 1105[6] (updated from AS 15[7] as of December 31, 2016) and ISA 315, respectively.[4] The American Institute of Certified Public Accountants identifies the following financial statement assertions:[8]
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Image source: Getty Images When financial statements are prepared, the preparer is asserting the fundamental accuracy of those statements. Learn what the various audit assertions are and how they can impact your business. Assertions are claims made by business owners and managers that the information included in company financial statements -- such as a balance sheet, income statement, and statement of cash flows -- is accurate. These assertions are then tested by auditors and CPAs to verify their accuracy. Auditors use a variety of assertions when performing an audit. Image source: Author Overview: What are audit assertions?Whether you’re with a Fortune 500 company, a nonprofit, or are a small business owner, any time you prepare financial statements, you are asserting their accuracy. Audit assertions, also known as financial statement assertions or management assertions, serve as management’s claims that the financial statements presented are accurate. When performing an audit, it is the auditor’s job to obtain the necessary evidence to verify the assertions made in the financial statements. Whether you’re using accounting software or recording transactions in multiple ledgers, the audit assertion process remains the same. Types of assertionsThere are numerous audit assertion categories that auditors use to support and verify the information found in a company’s financial statements. 1. ExistenceThe existence assertion verifies that assets, liabilities, and equity balances exist as stated in the financial statement. For example, if a balance sheet indicates inventory on hand for $10,000, it is the job of the auditor to verify its existence. The same process is used when verifying accounts receivable balances. The auditor is tasked with authenticating the accounts receivable balance as reported through a variety of means, including choosing a particular accounts receivable customer and examining all related activity for that particular customer. Bank deposits may also be examined for existence by looking at corresponding bank statements and bank reconciliations. Auditors may also directly contact the bank to request current bank balances. 2. OccurrenceThe occurrence assertion is used to determine whether the transactions recorded on financial statements have taken place. This can range from verifying that a bank deposit has been completed to authenticating accounts receivable balances by determining whether a sale took place on the day specified. 3. AccuracyAccuracy looks at specific transactions and then checks the accuracy of the recorded entry to determine whether the amounts are recorded correctly. In many cases, an auditor will look at individual customer accounts, including payments. to verify that the amount recorded as paid is the same as received from the customer. 4. CompletenessCompleteness helps auditors verify that all transactions for the period being examined have been properly entered in the correct period. For example, an auditor may want to examine payroll records to make sure that all salaries and wages expenses have been recorded in the proper period. This may include an examination of payroll records, a payroll journal, an active employee list, and any payroll accruals that were made and reversed in the period being examined. Inventory can also play a large role in the completeness assertion, with auditors looking at inventory transactions that took place during a specific period by examining inventory levels and corresponding sales numbers to determine that inventory was recorded properly. Completeness, like existence, may examine bank statements and other banking records to determine that all deposits that have been made for the current period have been recorded by management on a timely basis. Auditors may also look for any deposits in the bank that have not been recorded. 5. ValuationThe valuation assertion is used to determine that the financial statements presented have all been recorded at the proper valuation. For instance, the reporting of a company's accounts receivable account does not provide a guarantee that the customer will pay the accounts receivable amount owed. In this case, an auditor can examine the accounts receivable aging report to determine if bad debt allowances are accurate. Inventory is another area that auditors may review to determine that inventory is properly valued and recorded using the appropriate valuation methods. 6. Rights and obligationsRights and obligations assertions are used to determine that the assets, liabilities, and equity represented in the financial statements are the property of the business being audited. In other words, if your small business is being audited, the auditor may ask for proof that the cash balance of your bank account belongs to the business. Auditors may look at other assets as well to determine whether they are the property of the business or are just being used by the business. Liabilities are another area that auditors will review to determine that any bills paid from the business belong to the business and not the owner. 7. ClassificationThe classification assertion addresses the financial statements themselves. Are the statements presented properly in an acceptable format? Do they include all of the necessary information and related disclosures? Are they easy to understand? For example, accounts payable notes payable and interest payable are all considered payables, but they are all very separate entities and should be reported as such. For example, notes payable transactions should never be classified as an accounts payable transaction, with the same being true for interest payable transactions. It is the auditor’s responsibility to determine that these items are properly disclosed in the financial statements. 8. Cut-offThe cut-off assertion is used to determine whether the transactions recorded have been recorded in the appropriate accounting period. Payroll and inventory balances are often checked for cut-off accuracy to determine that the activity that took place was recorded in the appropriate period. This is particularly important for those accruing payroll or reporting inventory levels. The audit assertions above are used in three different categories.
FAQs
Audits don’t have to be scaryYour financial statements are your promise or your assertion that everything contained in those statements is accurate. The job of an auditor is to test those assertions for accuracy. Unless you’re an auditor or CPA, you’ll never have to worry about testing audit assertions, and if you continue to enter financial transactions accurately, you won’t have much to worry about during the audit process. However, knowing what these assertions are and what an auditor will be looking for during the audit process can go a long way toward being better prepared for one. What is valuation and allocation assertion?Accuracy, valuation and allocation – means that amounts at which assets, liabilities and equity interests are valued, recorded and disclosed are all appropriate. The reference to allocation refers to matters such as the inclusion of appropriate overhead amounts into inventory valuation.
What are management assertions about financial information?There are generally five accounting assertions that the preparers of financial statements make. They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.
What is valuation assertion?The valuation assertion is used to determine that the financial statements presented have all been recorded at the proper valuation. For instance, the reporting of a company's accounts receivable account does not provide a guarantee that the customer will pay the accounts receivable amount owed.
Which of the following are the assertions for transactions and events?Transactions and events. Occurrence — the transactions recorded have actually taken place.. Completeness — all transactions that should have been recorded have been recorded.. Accuracy — the transactions were recorded at the appropriate amounts.. Cutoff — the transactions have been recorded in the correct accounting period.. |