Management Assertions & Audit Objectives (Chapter 6)

Management Assertions
Implied or expressed representations by management about classes of transactions, related account balances, and presentation and disclosures in the financial statements.
Relevant Assertions
Assertions that have a meaningful bearing on whether an account is fairly stated and used to assess the risk of material misstatement and the design and performance of audit procedures.
A comparison of information (financial statements) to established criteria (assertions established according to accounting standards.
PCAOB Assertions
1. Existence/Occurrence
2. Completeness
3. Valuation or Allocation
4. Rights and Obligations
5. Presentation and Disclosure
Existence or Occurrence
Assets or liabilities of the public company exist at a given date, and recorded transactions have occurred during the period.
All transactions and accounts that should be presented in the financial statements are so included.
Valuation or Allocation
Assets, liability, equity revenue, and expense components have been included in the financial statements at appropriate amounts.
Rights and Obligations
The public company holds or controls rights to the assets, and liabilities are obligations of the company at a given date.
Presentation and Disclosure
The components of the financial statements are properly classified, described, and disclosed.
AICPA Management Assertions Categories
1. Assertions about classes of transactions and events for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
Transaction-Related Audit Objectives
Audit objectives that are closely related to the management’s assertions about classes of transactions, but are more specific transaction-related audit objectives for each class of transactions.
Occurrence Transaction-Related Audit Objective
Recorded transactions exist.

Determines whether recorded transactions have actually occurred. (Have you recorded a sale that has never actually happened?)

Deals with potential overstatement. (Saying a sales transaction occurred when it actually hasn’t.)

Completeness Transaction-Related Audit Objective
Existing transactions are recorded.

Deals with whether all transactions that should be included in the journals have actually been included. (A sale has actually occurred, but it hasn’t been recorded.)

Deals with potential understatement. (Failing to record a sales transaction that has occurred.)

Accuracy Transaction-Related Audit Objective
Recorded transactions are stated at the correct amounts.

Addresses the accuracy of information for accounting transactions is one part of the accuracy assertion for classes of transactions. (The wrong selling price was used for billing, extension or adding errors occurred in billing, or the wrong amount was included in the sales journal.)

Posting and Summarization Transaction-Related Audit Objective
Recorded transactions are properly included in the master files and are correctly summarized.

Deals with the accuracy of the transfer of information from recorded transactions in journals to subsidiary records and the general ledger. (Violations include recording a sales transaction in the wrong customer’s record, or at the wrong amount in the master file, which then causes the amounts in the sales and the general ledger to be inaccurate.)

Utilizing computers reduces the risk of inaccuracies caused by human errors, however the auditor must first establish that the computer is functioning properly.

Classification Transaction-Related Audit Objective
Transactions included in the client’s journals are properly classified.

Addresses whether transactions are included in the appropriate accounts.

(Misclassification examples: Recording cash sales as credit sales, misclassifying commercial sales as residential sales.)

Timing Transaction-Related Audit Objective
Transactions are recorded on the correct dates.

The auditor’s counterpart to management’s cutoff assertion.

Failing to record a sale when it should be recorded.

Existence Balance-Related Audit Objective
Amounts included exist.

(Example of a violation: Including an account receivable from a customer in the accounts receivable trial balance when there is no receivable from that customer.)

Deals with potential overstatement.

Completenes Balance-Related Audit Objective
Existing amounts are included.

Deals with whether all amounts that should be included have actually been included.

(Example violation: Failure to include an account receivable from a customer in the accounts receivable trial balance when a receivable exists.)

Deals with potential understatement.

Accuracy Balance-Related Audit Objective
Amounts included are stated at the correct amounts.

One part of the valuation and allocation assertion for account balances.

(Example violations: An inventory item on a client’s inventory listing can be wrong because the number of units of inventory on hand was misstated, the unit price was wrong, or the total was incorrectly extended.)

Classification Balance-Related Audit Objective
Amounts included in the client’s listing are properly classified.

(Examples: Ensuring the accounts receivable listing, accounts are properly separated into short-term and long-term, and amounts due from affiliates, officers, and directors are classified separately from amounts due from customers.)

Another part of the valuation and allocation assertion for account balances.

Cutoff Balance-Related Audit Objective
Transactions near the balance sheet date are recorded in the proper period.

Determines whether transactions are recorded and included in account balances in the proper period.

A third part of the valuation and allocation assertion for account balances.

Different from the timing transaction-related audit objective that deals with proper timing of recording transactions throughout the year, whereas the cutoff balance-related audit objective deals with transactions near year-end.

Detail Tie-In Balance-Related Audit Objective
Details in the account balance agree with related master file amounts, for to the total in the account balance, and agree with the total in the general ledger.

Ensures that the details on lists are accurately prepared, correctly added, and agree with the general ledger.

(Example: Individual accounts receivable on a listing of accounts receivable should be the same in the AR master file, and the total should equal the general ledger account.

A fourth part of the valuation and allocation assertion for account balances.

Realizable Value Balance-Related Audit Objective
Assets are included at the amounts estimated to be realized.

Concerned with whether an account balance has been reduced for declines from historical cost to NRV or when accounting standards require fair market value.

(Example: Considering the adequacy of the allowance for uncollectible accounts receivable and write-downs of inventory for obsolescence.)

A fifth part of the valuation and allocation assertion for account balances.

Rights and Obligations Balance-Related Audit Objective
In addition to existing, most assets must be owned before it is acceptable to include then in the financial statements.

Liabilities must belong to the entity.

Rights are always associated with assets and obligations with liabilities.

The auditor’s counterpart to the management assertion of right and obligations for account balances.

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