2E1 - Assertions

2E1 - Assertions Nature of Assertions - Assertions are representations made by management o Embodied in the financial statements o Implicit or explicit o Used by the auditor to consider the different types of potential misstatement that MAY occur CAP - Classes of Transactions : For the entire period under audit - Account Balances : At the period end - Presentation and Disclosure Classes of Transactions - Occurrence : Recorded transactions and events occurred and pertain to the entity - Completeness : All transactions and events recorded - Accuracy : Amounts and other data recorded appropriately - Cutof : Transactions and events recorded in correct period - Classification : Transactions and events recorded in proper accounts Accounts Balances - Existence : Assets, liabilities, and equity interests exist - Rights and Obligations : Entity holds or controls the rights to assets, and liabilities are obligations of the entity - Completeness : All assets, liabilities, and equity interests have been recorded - Valuation and Allocation : Assets, liabilities, and equity interests are included at appropriate amounts o Any resulting adjustments are recorded appropriately Presentation and Disclosure - Occurrence & Rights & Obligations : Disclosed events and transactions have occurred and pertain to the entity - Completeness : All disclosures have been included - Classification and Understandability : Financial information is appropriately presented and escribed o Disclosures are clearly expressed - Accuracy and Valuation : Financial and other information are disclosed fairly and at appropriate amounts

Tests of Completeness Key Words - Trace - Prenumbered documents - Unrecorded - Understatements - Cut-off Examples - Trace from source to accounting records o Search for unrecorded transactions or events o Results in understatement in accounts - Pre-numbered documents are a relevant internal control - Cut-of testing can relate to both existence and completeness assertions in classes of transactions Tests of Existence and Occurrence Key Words - Vouch - Valid - Observation - Confirmation - Overstatements Examples - Vouch from accounting records to supporting documentation o Ensures transactions and events are valid o Results in overstatements in accounts - Observation is a test used to verify existence of fixed assets or inventory - External confirmation is a test used to verify existence of cash or accounts receivable Tests of Valuation - Accuracy Key Words - Recalculating - Recomputing - Price testing - Properly valued - Fair value - Contra accounts Examples - Recalculating and recomputing amounts - Price testing of inventory is a valuation test - Investments valuation tests include the following: o Temporary & Available For Sale - Fair value o Held to Maturity - Reported at amortized cost o Cost vs. Equity Method

Valuation - Contra Account Examples - Contra accounts used to ensure net presentation reflects appropriate value o AR & Allowance for Doubtful Accounts o Fixed Assets & Accumulated Depreciation o Intangibles & Amortization o Bonds & Premiums and Discounts o Sales and Sales Returns & Allowances o Purchases and Purchase Returns & Allowances Tests of Rights and Obligations - Inspect evidence of rights o Deed, title, receipts, cancelled checks - Inspect evidence of obligations o Debt agreements, external confirmations Test of Classification & Understandability - Ensure transactions and events are recorded in proper accounts o Properly classified - Transactions and events are appropriately presented and described - Transfers between accounts are recorded properly Question #1 Which of the following is a management assertion regarding account balances at the period end ? a) Transactions and events that have been recorded have occurred and pertain to the entity b) Transactions and events have been recorded in the proper accounts c) The entity holds or controls the rights to assets, and liabilities are obligations of the entity d) Amounts and other data related to transactions and events have been recorded appropriately Question #2 An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of a) Valuation or allocation b) Completeness c) Existence or occurrence d) Rights and obligations Question #3 In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? a) Completeness b) Existence or occurrence c) Valuation or allocation d) Rights and obligations