Risk Assessment and Financial Statement Assertions Overview v2

Editor's Notes

• #2:  "Auditing Standard No. 15.11". http://pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 March 2015. "Auditing Standard No. 15.2". http://pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 March 2015.  "INTERNATIONAL STANDARD ON AUDITING 315 (REVISED) A124". http://www.ifac.org/. International Federation of Accountants. Retrieved 15 March 2015.  "AU Section 326". aicpa.org. American Institute of Certified Public Accountants. Retrieved 15 March 2015. http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00326.pdf
• #3: Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements (management) is making to its users. Financial statements include assertions related to the recognition, measurement, presentation, and disclosure of the financial information contained within such statements.  The role of the auditor in a financial statement audit is to obtain evidence as to whether management's assertions can be supported. Both United States and International auditing standards include guidance related to financial statement assertions. The PCAOB (Public Company Accounting Oversight Board) and the IFAC (International Federation of Accountants) address financial statement assertions in AS 15 and ISA 315, respectively. Auditors generally classify assertions into three categories:
• #4: ISA 315 (International Standard on Auditing 315 [Revised]) Financial statement assertions are classified into the following five: Existence: The assertion on existence is made to check whether the specified assets and liabilities are present at the given date. It is also required to check that the transactions that are recorded took place at the specified date. In order to test these items of the financial statement, it is not sufficient that only books are consulted which record the assets or the liabilities. There should be proof of the existence of the physical assets or liability. For checking existence help is also sought from outside.   Completeness: Checking completeness of a financial statement is to analyze whether all the transactions that are already given in the financial statement are correctly included. In order to abide by the completeness assertion, the auditors prove with the help of sufficient evidence that all the recorded transactions deserve to be included. This is further supported with an external document so as to provide evidence regarding the occurrence of the transaction.   Valuation: Valuation basically checks whether the different components of the financial statement have been included in the right proportion. The components are assets, liabilities, expense and revenue. The auditor does this with the help of GAAP. Rights and Obligations: This is to check whether the assets that are included in the financial statement are the rights and the liabilities are the obligations of the company. In order to ensure this, sometimes special purpose entities are created. Presentation and Disclosure: This assertion is to ensure whether the items in the financial statements are classified in the right way. It is important to check that the account balance is calculated as well as disclosed properly.
• #5: ISA 315 (International Standard on Auditing 315 [Revised]) Transactions and Events: OCCURRENCE: The transactions recorded actually took place. (Salaries & wages expense has been incurred during the period in respect of the personnel employed by the entity. Salaries and wages expense does not include the payroll cost of any unauthorized personnel.) COMPLETENESS: all transactions that should have been recorded have been recorded. (Salaries and wages cost in respect of all personnel have been fully accounted for) ACCURACY: The transactions were recorded at the appropriate amounts. (Salaries and wages cost has been calculated accurately. Any adjustments such as tax deduction at source have been correctly reconciled and accounted for) AUTHORIZATION: All transactions were properly authorized. CUTOFF: The transactions have been recorded in the correct accounting period. (Salaries and wages cost recognized during the period relates to the current accounting period. Any accrued and prepaid expenses have been accounted for correctly in the financial statements.) CLASSIFICATION: the transactions have been recorded in the appropriate caption. (Salaries and wages cost has been fairly allocated between:-Operating expenses incurred in production activities;-General and administrative expenses; and any other classification used by SLB)
• #6: ISA 315 (International Standard on Auditing 315 [Revised]) Accounts Balance as of period end: EXISTENCE: Assets, liabilities and equity balances exist. (Inventory recognized in the balance sheet exists at the period end.) RIGHTS AND OBLIGATIONS: the entity legally controls rights to its assets and its liabilities faithfully represent its obligations. (Audit entity owns or controls the inventory recognized in the financial statements. Any inventory held by the audit entity on account of another entity has not been recognized as part of inventory of the audit entity.) COMPLETENESS: all balances that should have been recorded have been recorded. (All inventory units that should have been recorded have been recognized in the financial statements. Any inventory held by a third party on behalf of the audit entity has been included in the inventory balance.) VALUATION AND ALLOCATION: balances that are included in the financial statements are appropriately valued and allocation adjustments are appropriately recorded. (Inventory has been recognized at the lower of cost and net realizable value in accordance with IAS 2 Inventories. Any costs that could not be reasonably allocated to the cost of production (e.g. general and administrative costs) and any abnormal wastage has been excluded from the cost of inventory. An acceptable valuation basis (as per GAAP) has been used to value inventory cost at the period end (e.g. FIFO, LAP, PUP etc.)
• #7: ISA 315 (International Standard on Auditing 315 [Revised]) Presentation and Disclosure: OCCURRENCE: The transactions have occurred. (Transactions with related parties disclosed in the notes of financial statements have occurred during the period and relate to the audit entity.) RIGHTS AND OBLIGATIONS: The transactions pertained to the entity. COMPLETENESS: All disclosures that should have been included in the financial statements have been included. (All related parties, related party transactions and balances that should have been disclosed have been disclosed in the notes of financial statements.) CLASSIFICATION AND UNDERSTANDABILITY: Financial statements are appropriately presented and described, and information in disclosures is clearly expressed. (The nature of related party transactions, balances and events has been clearly disclosed in the notes of financial statements. Users of the financial statements can clearly determine the financial statement captions affected by the related party transactions and balances and can easily ascertain their financial effect.) ACCURACY AND VALUATION: Financial and other information is disclosed fairly and at appropriate amounts. (Related party transactions, balances and events have been disclosed accurately at their appropriate amounts.)