Conceptual Framework of Assurance II: Types of Assertions Joshua Onome Imoniana September 8, 2014.

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Presentation transcript:

Conceptual Framework of Assurance II: Types of Assertions Joshua Onome Imoniana September 8, 2014

Today’s Objectives What is an assertion? Useful steps to verify an assertion. An examination of different types of financial statement assertions. Group Activity

Assertions What is an assertion? Confidently declared to be so; “the asserted value of the painting” Stated, declared or alleged, especially with confidence but no proof In a financial audit, management assertions or financial statement assertions are the set of information that the preparer of financial statements (management) is providing to another party.

A Set of Steps to Verifying Assertions (1) Identify assertion(s) being made by asserter; (2) Assess and justify the assertion’s risk of (material) misstatement; How do we assess/justify this risk? (3) Determine an attest objective for verifying the assertion; i.e. a broad action statement of what you will do. (4) Determine an attest procedure that achieves the objective and addresses the risk of misstatement. i.e. specify “what” evidence and “how” you will use it.

Financial Statement Assertions (PCAOB: AS No. 15) Existence (or Occurrence) Completeness Valuation (or Allocation) Rights & Obligations Presentation & Disclosure

Financial Statement Assertions Existence (or Occurrence) Do the assets, liabilities, and equities exist? Did the recorded transactions that gave rise to revenue and expenses occur? In other words: are there items included in the F/S that should not be there? The Authorization assertion is a form of Existence (or Valuation).

Financial Statement Assertions Completeness Are all assets, liabilities, and equities recorded? Are all transactions that gave rise to revenue and expenses recorded? In other words: is there anything missing from the F/S that should be there? The Cutoff assertion is a form of Completeness (or Existence).

Financial Statement Assertions Valuation (or Allocation) Are the amounts for assets, liabilities, equity, revenue, and expenses appropriately recorded? Have appropriate allocations or adjustments been made (e.g. amortization, impairment)? In other words: are amounts in the F/S recorded in accordance with GAAP? The Accuracy assertion is a form of Valuation.

Financial Statement Assertions Rights and obligations Does the company hold the rights to the assets? Are the liabilities obligations of the company? In other words: are there assets (liabilities) included in the F/S that the company has no rights to (has no obligation to pay)? In other words: are there liabilities (assets) excluded from the F/S that the company has an obligation to pay (still has rights to)?

Financial Statement Assertions Presentation and Disclosure Are the amounts for assets, liabilities, equity, revenue, and expenses properly classified, described, and disclosed in the F/S? In other words: are the F/S appropriately presented and described in accordance with GAAP? Are F/S disclosures adequate, complete, and understandable? The Classification assertion is a form of Presentation and Disclosure.

Example: Assertions in Financial Statement Context Account Receivable: $5,000,000 (1) Existence: all recorded receivables exist (2) Completeness: all receivables are recorded (3) Valuation: receivables are carried at the net realizable value (4) Rights and obligations: entity has rights to receivables (5) Presentation and disclosure: receivables are properly presented and requisite disclosures are made

Activity: Auditing Deferred Revenue at Caribou Creek

Example of an Objective & an Audit Procedure Objective: Verify that all gift card liabilities exist. Audit procedure: 1. Vouch from gift card subledger to sales invoices/card sales. In regular English, start by looking at the system/report that summarizes all recorded liabilities. Pick a sample of recorded liabilities and work backwards to match the report details for each item in the sample to a physical or electronic sales invoice/record.

Match Objective with Appropriate Procedure Obj. 1: Verify that unredeemed & unabandonned gift cards are recognized as deferred revenue not revenue Obj. 2: Verify that all gift card balances are recorded Audit procedures: 1. Select a sample of sales invoices and match to gift card subledger or general ledger to ensure the sale was recorded. 2. Examine/reperform management’s hindsight analysis of abandonment. 3. Test a sample of gift card balances for unclaimed property compliance. 4. Select a sample of sales invoices and match to gift card subledger or general ledger to ensure the sale was recorded in the proper account.

Today’s Objectives What is an assertion? Useful steps to verify an assertion. An examination of different types of financial statement assertions. Group Activity

For Next Class Relevant readings for next class: MGP Chapters 3 & 4 In-class Quiz