Assertions

Question 1

Assertions

Answer 1

• Made by management on each Income statement and balance sheet account when preparing FS
• auditor evaluates assertions to evaluate RMM
• Assertions are made for: 1) account balances (BS accounts) and 2) classes of transactions (IS accounts)

Question 2

Assertions for account balances

Answer 2

1) existence (inventory exists)
2) Rights and obligations (company controls rights to inventory)
3) completeness (balance of inventory is complete)
4) accuracy/valuation/allocation (inventory value is proper)
5) classification (inventory is classified properly)
6) presentation (inventory presented properly)

Question 3

Existence – substantive testing

Answer 3

• confirmation: send AR confirmations to customers to test existence of AR

Question 4

Rights & Obligations – substantive testing

Answer 4

• Inspection: test bank covenant to ensure met and therefore client owns all assets tests rights to PPE balance

Question 5

Completeness – substantive testing

Answer 5

• Reperformance: re-count inventory to test completeness of inventory balance

Question 6

Valuation – substantive testing

Answer 6

• Inspection: examine receipts for AR outstanding over 90 days to check for bad debt therefore testing the valuation of AR

Question 7

Classification – substantive testing

Answer 7

• Inspection: review AR to check if CR balances should be liabilities

Question 8

Presentation – substantive testing

Answer 8

• Confirmation: examine legal documents to ensure any note disclosures have been included in the FS

Question 9

Assertions for classes of transactions

Answer 9

1) occurrence (have transactions occurred)
2) Completeness (have all transactions been recorded)
3) Accuracy (measured and recorded accurate)
4) Cut-off (recorded in correct period)
5) Classification (recorded to appropriate account)
6) presentation (presented properly under framework)

Question 10

Occurrance – substantive testing

Answer 10

• reperformance: tracing payroll expenses for G/L to payroll supporting documents (timesheets)

Question 11

Completeness – substantive testing

Answer 11

• Inspection: inspect sales invoice and trace the sale to the GL to ensure recorded

Question 12

Accuracy – substantive testing

Answer 12

• Recalculation: recalculate interest expense

Question 13

Cut-off – substantive testing

Answer 13

• Inspection: inspect shipping documents to check the date that inventory shipped

Question 14

Classification – substantive testing

Answer 14

• inspection: review GL and supporting documents to ensure proper valuation

Question 15

Presentation – substantive testing

Answer 15

• Inspection: review revenue contracts to ensure revenue streams are presented under correct amount

Question 16

Relationship between IS and BS assertions

Answer 16

• measurement: accuracy (IS), valuation (BS)
• overstatement: occurrence/cut-off (IS), existence (BS)
• Understatement: Completeness/cut-off (IS), completeness/existence (BS)