Management Assertions
Your first step in learning to audit is to understand and be able to identify management assertions for events and transactions. You will need to be able to relate these to account balances and other financial statement disclosures. You must be able to recognize what is being asserted by management before you can use audit procedures to test the assertions. Therefore, you must be able to communicate in writing what you know in your head. Written communication is essential to the audit process. Basically, an auditor plans and performs an audit to gather evidence that will support or not support these management assertions for every account balanced is closed and footnote disclosure made in the set of financial statements. You will use these assertions to organize your audit objectives (why you do the procedures that you do).
Existence and Occurrence
Rights and Obligations
Completeness
Valuation and Allocation
Presentation and Disclosure
Directions:
For the items below,
A. Identify and explain what management is asserting to the public that the auditor must test. There may be more than one assertion in the statement made by management, so be sure to explain why you chose each assertion that is identified.
B. Show the balance sheet effect and the income statement effect of the management assertion by identifying the account balances affected on each financial statement.
Example:
The bond issues were authorized by the entire board of directors. Assertion: Existence because the bond transactions would not exist for the company if the company had not authorized the event.
Assertion:
Rights and Obligation because the bonds transactions represent a true obligation of the company.
Balance Sheet Effect:
Asset: Cash account due to proceeds from initial sale of bonds and payment of bond expense and principle over time
Liabilities: Bonds payable, current portion of bonds payable, bond expense payable
Perhaps a contra account such as bonds discount or premium that must be amortized to show net realizable value of bond, and the required footnote disclosure Income Statement Effect: Bond interest expense
Problems:
1. The new piece of equipment has arrived and is being used in production of goods.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
2. The accounts receivables were not sold nor are they used as collateral.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
3. The lease is an operating lease.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
4. The assets were purchased for cash and a mortgage from the bank at this amount.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
5. All liabilities have been included and non have been left out.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
6. We have the appropriate amount of life insurance for the owner/CEO and fire insurance for the building.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
7. We own inventory that is located in the warehouse maintained by another company.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
8. Any inventory that has not been shipped to a customer is ours.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
9. Sales commission is based on a set percentage of sales per sales rep.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
10. The lease agreement is for housing students who work for Disney on the internship program. We do not own the building, but we plan to treat it as a capital lease rather than an operating lease because it is a 30 year lease.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
11. We record sales revenue when the client says that they want the product and we receive the paperwork. We do not check their credit because most of the sales are for cash or credit cards that is collected immediately.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
12. Due to a rule passed by Congress that allows us not to record a liability if we set up a special purpose entity for the project and meet the 3% rule of outside ownership (yes, we still essentially own 97% of the joint venture), we do not have to report the loan the SPE borrowed from Bank of America, even though we did have to put up our stock as collateral.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
13. In regards to the SPE, we recorded sales revenue and increased cash and accounts receivable when we sold the joint venture to the SPE.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
14. We do not own the asset because we sold the asset to the SPE at market value, which exceeded the old book value.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
15. The costs owed to other phone companies for additional services we provide to our customers that we do not have the capacity to provide is an asset. Even though it is provided on a daily basis, it is tied to long term contracts.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
16. My daughter’s car is a company asset and her insurance is covered by the company insurance policy.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
17. The building is depreciated by an accelerated method over 4 years because we do not plan to keep it forever and want to reduce our income tax expense for these years.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:
18. The birthday party for my wife that cost over $1 million dollars was not approved by the BOD, but it was a company expense because most of the people attending were customers.
Assertion(s):
Balance Sheet Effect:
Income Statement Effect:

Problems:
1. The new piece of equipment has arrived and is being used in production of goods.
2. The accounts receivables were not sold nor are they used as collateral.
3. The lease is an operating lease.
4. The assets were purchased for cash and a mortgage from the bank at this amount.
5. All liabilities have been included and non have been left out.
6. We have the appropriate amount of life insurance for the owner/CEO and fire insurance for the building.
7. We own inventory that is located in the warehouse maintained by another company.
8. Any inventory that has not been shipped to a customer is ours.
9. Sales commission is based on a set percentage of sales per sales rep.
10. The lease agreement is for housing students who work for Disney on the internship program. We do not own the building, but we plan to treat it as a capital lease rather than an operating lease because it is a 30 year lease.
11. We record sales revenue when the client says that they want the product and we receive the paperwork. We do not check their credit because most of the sales are for cash or credit cards that are collected immediately.
12. Due to a rule passed by Congress that allows us not to record a liability if we set up a special purpose entity for the project and meet the 3% rule of outside ownership (yes, we still essentially own 97% of the joint venture), we do not have to report the loan the SPE borrowed from Bank of America, even though we did have to put up our stock as collateral.
13. In regards to the SPE, we recorded sales revenue and increased cash and accounts receivable when we sold the joint venture to the SPE.
14. We do not own the asset because we sold the asset to the SPE at market value, which exceeded the old book value.
15. The costs owed to other phone companies for additional services we provide to our customers that we do not have the capacity to provide is an asset. Even though it is provided on a daily basis, it is tied to long term contracts.
16. My daughter’s car is a company asset and her insurance is covered by the company insurance policy.
17. The building is depreciated by an accelerated method over 4 years because we do not plan to keep it forever and want to reduce our income tax expense for these years.
18. The birthday party for my wife that cost over $1 million dollars was not approved by the BOD, but it was a company expense because most of the people attending were customers.