馃攳
Lesson 7: Auditing Management Assertions - YouTube
Channel: Executive Finance
[8]
in this lesson I want to describe to you
[11]
the concept of management assertions in
[14]
our previous lesson we talked about
[16]
cycles and cycles are simply a grouping
[19]
of accounts that use similar processes
[21]
within the organization for instance the
[24]
sales cycle involves sales receivables
[26]
and cash receipts the acquisition cycle
[29]
involves inventory capital assets
[32]
accounts payable and cash disbursements
[34]
and so on and so forth until all the
[36]
accounts in the financial statements
[38]
have been grouped within one or more
[40]
cycles to which they relate this little
[42]
diagram shows how all of these cycles
[45]
interrelate with one another this is the
[47]
first step and we do this simply for
[49]
audit efficiency so that we can audit
[51]
like accounts simultaneously keep in
[54]
mind that every journal entry has both a
[57]
debit and a credit so if you're able to
[59]
substantiate you to the debit or the
[61]
credit you are indirectly proving the
[64]
other side of the entry does that make
[65]
sense but what exactly are we proving
[68]
getting back to our income statement we
[72]
need to form an opinion on whether each
[74]
and every one of these numbers is fairly
[77]
presented that means the amount is
[80]
neither higher nor lower than what has
[83]
been represented and that management has
[85]
got all the dollars recorded in the
[88]
right account let's flip over to the
[90]
balance sheet for a moment because there
[92]
are other things we need to substantiate
[94]
here not only do we need to ensure that
[96]
the numbers are appropriately valued we
[100]
also need to ensure that the company
[102]
owns its assets and that it's obligated
[106]
to pay its liabilities think of it this
[109]
way when management puts these
[111]
statements in front of the auditors
[113]
management is asserting to us that these
[117]
are the numbers and that they don't have
[119]
a second set of books hidden away in the
[121]
back of the closet management's
[123]
assertions are multifaceted and these
[126]
can be dissected to help us focus our
[128]
audit procedures so let's take inventory
[131]
for example what is management asserting
[134]
about this balance well first of all
[137]
management is asserting that the bow
[140]
some inventory exists and that is
[142]
physically present
[143]
Sakhalin management is asserted to us
[146]
that it has the right to the inventory
[148]
and that it hasn't been sold or owned or
[151]
used by someone else say in a contingent
[153]
arrangement this is called the rights
[155]
and obligations assertion or ownership
[158]
assertion thirdly management is
[160]
asserting that all the inventory that it
[162]
owns has been recorded and that there
[165]
isn't another hotel storeroom full of
[168]
unrecorded inventory somewhere in its
[170]
operations in other words the balance is
[173]
complete fourthly management is
[176]
asserting that the inventory balance was
[178]
accurately measured both in terms of
[181]
quantities and prices and calculations
[183]
that determine the carrying value
[185]
fifthly management is considered the
[188]
appropriate valuation of inventory as we
[191]
know GAAP requires inventory to be carry
[194]
at the lesser of cost and net realizable
[196]
value so management assertion is that
[199]
they've made this determination for us
[201]
by considering such things as
[203]
obsolescence and ultimate selling prices
[206]
6ly that the inventories have been
[208]
appropriately classified as required by
[211]
GAAP say between raw materials
[213]
work-in-process and finished goods other
[215]
assertions exist for the detail tie in
[218]
with the general ledger and the
[219]
achievement appropriate cutoff itaiian
[222]
is a representation that the balance of
[224]
inventory comes from the general ledger
[227]
and the general ledger is the foundation
[230]
of the financial system cut-offs speaks
[233]
to ensuring that the transactions that
[235]
occurred near the period end date get
[238]
reported in the proper year for example
[241]
if you are a company that say ships on
[244]
the last day of the year with the goods
[247]
still in transit at the year-end date
[248]
and the title to the goods does not pass
[251]
until the customer receives delivery
[254]
then management must have a means of
[256]
determining how much inventory is in
[258]
transit to ensure that this in transit
[261]
inventory is included in the inventory
[264]
account on the balance sheet so what do
[266]
you think about the management
[267]
associates quite a lot to remember huh
[269]
for the most part assertions are
[271]
intuitive and when
[273]
you get your hands on the inventory
[275]
listing and you go to all the inventory
[277]
balance you'll naturally seek out the
[280]
evidence that addresses each of these
[282]
management assertions so without knowing
[285]
anything about auditing let's just see
[287]
if we can figure this out a little bit
[289]
what would you do to validate the
[292]
inventory balance that management is
[295]
asserting to you I'll pause and let you
[297]
consider this for a moment
[302]
you could look at the inventory and see
[305]
if it's actually there
[307]
that covers existence and to a certain
[309]
extent the valuation and allocation
[311]
assertions as you can see the condition
[314]
in the form of the inventory yourself
[316]
did you think of getting a listing of
[318]
the inventory and verifying it well
[320]
there's your accuracy assertion if you
[322]
agree what you saw - what is on your
[325]
list you may not realize it but you've
[327]
just verified completeness so do you see
[330]
how these assertions can be evaluated by
[332]
performing these sorts of audit
[334]
procedures of course we will talk about
[336]
this in a lot more detail in later
[338]
lessons as we get deeper and deeper into
[341]
the audit we've talked a lot about the
[343]
assertions for the balance sheet
[345]
accounts let's spend a moment comparing
[347]
the balance sheet assertions to the
[349]
other accounts which you should know are
[351]
the income statement accounts I've got
[353]
some good news for you here because the
[355]
assertions are very similar
[356]
instead of existence you have occurrence
[358]
so you have to verify that the
[361]
transaction reported actually happened
[364]
let's take an expense like payroll how
[367]
could we verify the payroll expense was
[369]
actually incurred hit the pause button
[371]
and think about this for a moment
[374]
and when you think you have an answer
[375]
press play to continue we first could
[380]
look at how the employees were paid we
[382]
could look for evidence that the
[384]
employees perform the work by looking at
[387]
their time cards we could check how much
[390]
these employees were paid by looking at
[393]
their wage rate or salary and their
[395]
personnel files all of these things
[397]
would help us verify that the payroll
[400]
expense reported actually occurred now
[404]
completeness is the opposite that is to
[406]
ensure
[407]
that all transactions have been reported
[409]
we are also concerned with similar
[412]
measurement assertions for instance
[414]
accuracy the amounts recorded were
[417]
calculated correctly classification that
[420]
is the transactions have been recorded
[423]
in the right accounts and posting in
[425]
summation which is really the same thing
[427]
as the detail tie-in we spoke of earlier
[429]
the allocation assertion is called
[431]
timing but don't be fooled this is the
[433]
same thing as the cutoff assertion we
[435]
discussed earlier that covers the
[438]
accounts on the trial balance but we
[440]
also need to consider the other
[441]
disclosures in our financial statements
[444]
as well after all our audit opinion
[447]
extends to this information as well as
[450]
this information is largely an extension
[453]
of the information presented in the
[454]
financial statements you might expect
[457]
that the same assertions are relevant so
[459]
for example consider related party
[462]
transactions GAAP requires separate
[465]
disclosure of these sorts of activities
[467]
because they may or may not be
[470]
transacted at fair value so the relevant
[473]
assertions are once again verifying the
[476]
related party transactions to determine
[478]
whether they are occurred ensuring that
[481]
all the related party transactions have
[483]
been reported which is completeness
[485]
verifying the rights and obligations
[487]
associated with any related party assets
[490]
or liabilities ensuring the transactions
[493]
were accurately reported and
[494]
appropriately classified and can be well
[496]
understood by the users
[498]
understandability is the only real new
[501]
assertion in this list and in principle
[503]
it makes sense given the nature of the
[505]
narrative note disclosure so there you
[508]
have it the so-called management
[510]
assertions while I try to desperately
[513]
oversimplify things for you I'm sure
[515]
more than a few of you are doing the
[518]
math in your head and you're thinking to
[520]
yourself if I have six cycles composed
[522]
of thousands of accounts let's say eight
[524]
assertions holy crap I'm going to be
[527]
auditing forever all is not as dire as
[529]
it may seem on the surface and for a
[532]
couple of reasons first of all keep in
[535]
mind that many audit procedures cover
[537]
off more than one
[538]
audit assertion as we'll see later
[540]
second we use a risk-based approach to
[543]
designing our audit procedures not all
[546]
the assertions are relevant or
[548]
sufficiently high risk to warrant the
[552]
same level of attention and third the
[555]
audit programs are well designed to
[557]
cover off the assertions you as an
[559]
auditor do not need to dream up the
[561]
procedures to cover off all the
[563]
assertions this will be done for you in
[566]
the audit software that you use however
[568]
it's still good that you understand the
[571]
notion of assertions because we we refer
[573]
to them often and you still need to be
[575]
able to identify which ones pose a
[579]
higher risk so that you can tailor the
[582]
audit programs to address those specific
[584]
risks so that's all for this lesson
[587]
until next time don't stop to get to the
[589]
top when you get to the top don't stop
Most Recent Videos:
You can go back to the homepage right here: Homepage