Hi readers! My name is Gus Patel, and I have offered to help with updates to content on the UFE Blog. I have recently been in your situation, having written the 2013 UFE. Currently, I work as an Audit Senior at BDO Canada LLP. In my spare time, I enjoy being active, as well as teaching students about accounting concepts.
Today we continue the discussion of financial statement assertions from yesterday.
Before getting into the specifics of each assertion, it might be helpful to understand why aspiring CA’s should care.
From the above chart, we can see that at the end of the day, the real essence of addressing assertions are to evaluate management’s overall position on the financial statements, either about transactions and events for the period under audit (See CAS 315 – A.124), or otherwise known as the income statement assertions or assertions about account balances that are at period end – or balance sheet assertions and finally presentation and disclosure assertions. Presentation assertions will not be covered in this post to focus on the most popular assertions on the UFE:
So what are the assertions and how can you pair them with a correct procedure?
Existence (or Occurence if you are referencing the Income Statement side)
This is essentially understood as management’s claim that the amounts recorded are actually genuine, or “exist”, and are not ficticious transactions. An existence error essentially is an account overstatement (i.e. something isn’t there when it is recorded that it is). An easy procedure to address whether anything exists is to actually physically verify. Auditors can physically count cash, inventory, or obtain confirmations on receivable balances.
Completeness is management’s claim that all transactions to be included are included, or “complete”. A completeness error would be an understatement (i.e. something is there which isn’t recorded). Therefore, an easy procedure to verify completeness is to do a floor-to-sheet count. Another example could be having auditors verify accruals are accurate through subsequent testing of related expenses.
All data (amounts) relating to the transactions are properly recorded. A good way to remember accuracy is to think of cases where there is something that management needs to calculate in order to arrive at an account balance. For example, foreign exchange needs to be accurately recorded, and a procedure to address the accuracy of foreign exchange would be to recalculate and compare to what management has recorded.
Ensuring appropriate cutoff means accounting for every transaction that occurred during the (financial statement) period without either aggressively recording entries which are within the next-periods transactions, or postponing the recording of transactions until the next period. An easy way to remember cut off is to think of revenue or balance sheet liabilities, things that management might be interested in delaying or accelerating due to bias for either obtaining a management bonus, or for covenant compliance. A procedure to address cut off is to determine the date of the transaction, either the sale or liability in this case.
Transactions occurring are within the correct accounts. For example, your revenue recorded really isn’t an expense, or an asset really isn’t a liability.
Rights and Obligations (balance sheet assertion only)
The entity holds the “right” or actually controls the asset or liability. For instance, an entity has the legal “right” to record property plant and equipment on the balance sheet if they have entered into a purchase agreement, and funny enough, the easy way to verify that is to look at the purchase agreement!
Valuation and Allocation (balance sheet assertion only)
Assets, liabilities and equity are included in the financial statement presentation at appropriate amounts, and all valuation adjustments are properly recorded in accordance with the financial reporting framework being used. Measurement of valuation can either be: fair value, historical cost, present value or a method of allocation of joint costs. Procedures to verify this could be comparing market data to ensure inventory does not require a write down, or evaluating the collectibility of receivables greater than 90 days – asking the question: is it really collectible?
Once you understand what the assertions are, the next challenging part is identifying which assertion addresses the real risk, because remember, all balance sheet assertions have: existence, rights and obligations, completeness and valuation and allocation assertions, and all income statement items have occurrence, completeness, accuracy, cutoff and classification assertions!
Again, remember these assertions are all in your CICA Handbook and can be referenced during your practice exams and in a pinch, even during the UFE! However, if you’re getting started now, procedures will be second nature to you.