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Using ASSERTIONS on the audit - examples of application - YouTube
Channel: AmandaLovesToAudit
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in today's video I'm going to take what
we know about assertions and then look
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at how we can apply them within the
audit context so let's get into it
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[music playing]
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hi welcome back to my regular viewers if
you're new to this channel my name is
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Amanda I teach auditing at university
and I'm really passionate about audit
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and accounting as a profession. So let's
look at why we use assertions.
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The first main reason is that assertions are
actually our characteristics that we use
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to tell whether the financial statements
are free from material misstatement.
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I don't know what exactly "true"
could be so we use the replacement of
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true and fair with 'free from material
misstatement' and we know that if our
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account meets the assertions for the
transactions or for the balances then
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that account is free from material
misstatement - it's true and fair.
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So the way that we can use our assertions in
regards to evaluating internal controls
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is that we can check whether there are
controls to meet each of our particular
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assertions. For example and we're looking
at say revenue transactions here we want
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to make sure that there is a control to
make sure that every transaction really
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did occur, I want to make sure that there
is a control to make sure that each of
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my transactions is recorded accurately
at the correct dollar amount. I also want
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to make sure that there is a control to
make sure that all of my transactions
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have been recorded in the correct period.
So what does the system do in terms of
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processing the transactions to make sure
that they're in this financial year it's
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processed exactly as it happened so we
don't have any cutoff issues and then
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classification - what are we doing or what
sort of internal control exists to make
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sure that the transaction is going to
the right debit and credit - the journal
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entry for that system is set up
correctly. so we can use these to
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evaluate internal controls. List out your
internal controls and then
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if there's an internal control for every
single assertion. If you have an
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assertion that doesn't have a matching
internal control well then that's a
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potential weakness in the internal
controls somewhere where a misstatement
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might filter in either intentionally or
accidentally into the financial
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statements. remember we need to collect
evidence on all of our assertions so for
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my balance sheet items do they all exist?
have they all been accurately recorded
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valued and allocated? have we recorded
all of our assets liabilities and
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owner's equity? have we classified them
correctly as current non current in the
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correct spot on the balance sheet? and
have we presented and disclosed them
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appropriately? so no matter what type of
substantive testing you're doing you
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want to make sure that you're checking
off each of the assertions now that
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doesn't mean that we spend equal amounts
of time so in audit if I've got four
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different nah let's do five different
assertions here I don't necessarily
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spend an equal amount of time on each of
my assertions instead I'm going to use
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risk I'm going to say which assertion
has the most risk and probably apply a
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greater amount of substantive testing
time and effort to that particular area
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some assertions may be less important
for some accounts than others they're at
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low risk if my statement and that means
to be able to understand whether it's at
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lower or higher risk of misstatement for
that particular assertion we need to
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understand our client all the clients
expected to overstate or understate
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their assets or liabilities or revenues
and expenses knowing the industry and
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knowing the client will help us
understand them better and understand
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what management behavior might be what
their intention or incentive to
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manipulate the accounts might be whether
that's over statement or under statement
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so let's look at an example of applying
assertions and I'm going to apply that
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to a balance sheet item of a particular
asset and let's look at
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my iPad pro here for Apple so we're
looking at Apple and we've got our
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assertions so if I'm looking at the
earth asset I need to make sure that
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with my iPads I want to make sure do
they exist if the company says that
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there are 500 iPads in stock do we have
500 in the warehouse so that's the first
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one
existence the second one is going to be
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accuracy valuation and allocation and
that really is for my iPad I've recorded
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it at my cost price how is that cost
calculated have I looked into all of the
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different components the direct material
the direct labour the overhead is the
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overhead allocated correctly to come up
with an accurate value for one
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particular item and then all of the
iPads in total
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are there any stock that's a previous
model that's obsolete that might need to
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be written off or decreased in its value
recorded on the balance sheet so we've
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covered existence we've covered accuracy
duties next one in a different color so
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that we can see it I also need to
consider completeness which is really
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have I recorded all of the iPads that I
have in stock now most of the time
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you're expecting companies to
accidentally or intentionally overstate
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their inventory and their assets to make
their leverage ratios little look a bit
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better their current and they're quick
ratios look a bit better so usually
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we're looking for is infant any
inventory there that's not recorded I
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might do that by using an analytic I
could do something like how many raw
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materials how much raw materials should
this have made in terms of product and
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do I see that so
completeness has it all been recorded
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now the next one is going to be rights
and obligations
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and in reality here we're actually more
worried about the Wrights do we actually
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own the iPads do we control them
to allow them to be recorded on our
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balance sheet as assets obligations
comes out more when it comes to
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liabilities and owner's equity more so
than for assets and then the final one I
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try to overhear I just realize I might
have written over my head is
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presentation has all the information
about inventory being presented and
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disclosed in our accounting financial
report appropriately so I'm going to
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look need to look at not just the number
but also management's disclosure in the
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notes and make sure that means if fruss
or in Australia our SS B's to end this
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video I'm going to offer everybody a
little interactive activity I was
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approached by the tech startup param
para they've been working with some
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universities in creating like a text
message style conversation with students
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to help them test their knowledge and
you can converse with this little chat
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bot essentially through a link now para
para haven't paid me at all to test
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their product or not getting anything
from them but I thought this might be a
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really interesting tool to use with you
my YouTube community it's absolutely
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free to try there'll be a link in the
description give it a go it's going to test
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you on your knowledge and understanding
of assertions with some little questions
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it's not very long it's just a short
little test if you think it's useful
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please let me know because if it does
have some use and you do find it
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valuable
we could build more of these to go with
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future videos now of course if you
thought the video was useful
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I'd always appreciate a thumbs up if you
haven't already considered subscribing
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make sure you check out my free audit
study guide on the Amanda loves to audit
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website I've covered the entire audit
process with all of my videos and
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lectures and standards all together in
one particular document so that you
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to search through my entire YouTube
channel I've got 250 videos on here's what
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can be a little bit complicated of
course if you have any questions about
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assertions as always drop them in the
comments and I look forward to seeing
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you next time thanks for watching bye
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