Rights and obligations. Valuation or allocation. Presentation and disclosure.
105 Existence or Occurrence Assertions about existence or occurrence deal with the whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during the given period. Managements’ asserts that the revenues and expenses shown in the income statements and cash on the cash flow are a result of transactions that occurred during the reporting period. The auditor’s concern on this subject relates to the overstatement of financials. Completeness Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are indeed included. The auditor’s concern about the completeness assertion relates to the possible understatements of financials through the omission of item or cut off problems.
106 Rights and Obligations Assertions about rights and obligations deal with whether assets are the right of the entity and the liabilities are the obligations of the entity at the reporting date. Valuation or Allocation Assertions about valuation or allocation deal with whether assets, liabilities, revenue, expense have been included in the financial statement at appropriate amounts. The reporting of a financial statement component at an appropriate amount means that: 1. the amount is clerically and mathematically accurate, and 2. has been determined to be in conformity with GAAP.
107 Determining whether amounts are in conformity with GAAP addresses the proper measurement of assets, liabilities, revenues, and expenses, which includes all of the following: Proper application of valuation principles such as cost, net realizable value, market value, and present value. Proper application of the matching principle. The reasonableness of management’s accounting estimates. Consistency in the application of accounting principles.
108 Presentation and Disclosures Assertions about presentation and disclosure deal with whether particular components of financial statements are properly classified, described, and disclosed. Disclosure often include the following aspects: • The disclosed events have occurred. • All disclosures have been included. • Information is clearly expressed. • The disclosed information is accurate and in appropriate amounts. The five basic assertions provide a roadmap to the process of collecting evidence. These allow the auditor to divide and find audit challenges by focusing on assertions. The auditor needs to collect evidence to evaluate management’s assertions for each material account balance.
109 II. Understand the Entity and Its Environment In order to render an opinion about fair presentation of financials, an auditor must understand the underlying economic substance of the entity’s business and its environment.
- Fall '16