Question

Assertion

A. Existence and Occurrence
B. Completeness
C. Rights and Obligations
D. Valuation or Allocation
E. Presentation and Disclosure

Identify the appropriate assertion for each of the following internal controls. Check all that apply.

1. The computer matches the customer number on the voucher with the customer number on the master customer file. (A) (B) (C) (D) (E)
2. Only the controller and the assistant controller have the authority to add a new vendor to the vendor master file. (A) (B) (C) (D) (E)
3. The computer checks batch totals and run-to-run totals to ensure that all transactions are processed. (A) (B) (C) (D) (E)
4. The manager of engine production reviews all the purchases charged to his responsibility center on a weekly basis, reviewing vendors, amounts, and accounts charged. (A) (B) (C) (D) (E)
5. The computer matches the date on the receiving report with the accounting period when the voucher is recorded. (A) (B) (C) (D) (E)
6. The computer prints a report of all the purchase orders that have not been received and receivings that have not resulted in the recording of a voucher. (A) (B) (C) (D) (E)

Answer 1

1.( A ) "Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period." Where does the auditor begin to support this assertion? Answer: The books and the ledger gather evidence that a transaction has occurred because the accounting system "captured" the transaction by recording it.

2. (C) "assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date." The adage "possession is nine-tenths of the law" hardly prevails in today's GAAP as many efforts are constantly being exerted to remove accounts from or simply not place them in the financial statements while retaining the use of the asset. Off statement financing has frequently resulted in an entity's receiving the use of an item without measuring or disclosing the transaction in the statements.

3. (D)

4.( D) "Assertions about valuation or allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts." The auditor has the guidance of GAAP to measure or disclose transactions and balances. On the surface, this assertion appears to be one of the least troublesome. However, the auditor should determine that the audit procedures selected are suitable for accomplishing the audit objective related to the assertion. For example, confirmation of accounts receivables provides valid evidence relating to the assertion of existence. However, the fact that the client's customers indicate that the amount on the face of the confirmation is correct provides little, if any, evidence that payment is assured. Valuation can be supported by the process of aging the current accounts receivable to evaluate the adequacy of the allowance account.

5.( B )

Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are so included." To support the completeness assertion, the auditor obtains sufficient, competent evidence that transactions that should be recorded have been recorded. The concept of materiality allows the auditor to support the statement that a sufficient number of transactions--as opposed to all transactions--have been recorded. Testing to support completeness originates with externally generated documentation that a transaction has occurred. The presence of tangible assets in a retail client's possession is evidence that the asset has been acquired. An invoice from a vendor and a receiving report from the warehouse supervisor or receiving clerk are examples of documents that are indicative that transactions have occurred and should be recorded. The direction of the effort is from the asset or from the externally created documents to the entries in the journal, to the ledger, and to the balance.

6. (E)   "assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed." The account balance not only must be properly measured but also adequately described and disclosed. A trade receivable, a receivable from an employee, a loan to an employee, and a loan to a related party are all receivables and usually can be readily measured at net realizable value. However, the presentation of each must reflect the individual characteristics of the transactions.