Solved Case 5-2 ZZZZ BestManagement assertions are implied

Content

• Understanding Financial Statement Assertions
• Chegg Products & Services
• Transaction-Level Assertions in Auditing
• AS 2305: Substantive Analytical Procedures
• Key Management Assertions Related to Long-Term Assets & Liabilities
• management assertions are a directly related to the

Accounting management assertions are implicit or explicit claims made by financial statement preparers. These assertions attest that the preparers abided by the necessary regulations and accounting standards when preparing the financial statements. There are five different financial statement assertions attested to by a company’s statement preparer. These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. If the auditor finds that the claims are inappropriate, it has implications for the audit report of the entity. The extensive level of assurance gives more reasonable confidence to the auditor.

It is possible that this balance actually exist (existence) and entity has all necessary rights over it (Rights and Obligations) but it lacks completeness. The general audit objectives described in Exhibit 7-2 may be applied to any category of transaction and the related account balances. Auditors design specific tests to address these objectives in each audit area. For example, an auditor will develop tests to determine whether a company has properly accounted for its borrowing transactions during the period. These tests are specific to the accounts and information systems in place at the company being audited.

Understanding Financial Statement Assertions

Since financial statements cannot be held to a lie detector test to determine whether they are factual or not, other methods must be used to establish the truth of the financial statements. Inventory is another area that auditors may review to determine that inventory is properly valued and recorded using the appropriate valuation methods. Accuracy 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.

Audit evidence consists of both information that supports and corroborates management’s assertions regarding the financial statements or internal control over financial reporting and information that contradicts such assertions. Responsibility for operations, compliance, and financial reporting lies with management of the company. A company’s various reports are assumed to represent a set of management assertions.

Chegg Products & Services

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. 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. Completeness helps auditors verify that all transactions for the period being examined have been properly entered in the correct period. Some of these include reviewing accounts and reconciliation of payables to supplier statements.

The entity holds or controls the rights to assets, and liabilities are the entity’s obligations. The presentation should be made as the applicable financial reporting framework. For these, the auditor needs to verify the backup documents which claim such investments have been made by the company.

Transaction-Level Assertions in Auditing

The four assertions included in this category are occurrence, rights & obligations, completeness, and valuation & allocation. Auditors may also directly contact the bank to request current bank balances. Financial statements are the documents that show financial health by calculating liquidity ratio, debt-equity ratio, return on equity ratio, bookkeeping for startups and so on. These statements help to attract investors to finance business activities. You can test the authenticity of the existence of the assertions by physically verifying all noncurrent assets and receivables. 3/ When using the work of a specialist engaged or employed by management, see AU sec. 336, Using the Work of a Specialist.

Assertions are claims that establish whether or not financial statements are true and fairly represented in the process of auditing. The rights and obligations assertion states that the company owns and has the ownership rights or usage rights to all recognized assets. For liabilities, it is an assertion that all liabilities listed on a financial statement belong to the company and not to a third party.