|
|
|
Assertions of Management about Economic Events in the Business
Management is responsible for preparing the financial statements of the organization. Each journal entry & transaction recorded in the books has at least 1 of these assertions applied. The 5 major assertions can be shortened to ECOVP - Existence, Completeness, Ownership, Valuation, Presentation and Disclosure. Below are management’s assertions about economic actions and events Management Assertions • Existence or Occurrence – used to establish that assets, liabilities and equities actually exist and that revenue and expense transactions actually occurred. Occurence refers to controls surrounding the purchase/sale of any investment must be properly initiated by an authorized individual. Here are some important points to consider: o Adequate documentation must support the purchase/sale of each security to ensure the process was properly initiated and approved o Commitment of resources to investment activities should be approved by the board of directors or by an executive with board-designated authority o Board of directors should establish general policies to guide the entity’s investment activities • Completeness –all transactions and accounts that should be presented in financial reports are included. Completeness refers to adequate controls should exist to ensure that all securities transactions are recorded. o Securities ledger should be maintained to record all securities owned by the client ?this sub ledger should be reconciled to the general ledger periodically o Regular review procedures should exist to ensure that all dividends and interest earned on investments are recorded regularly by the entity’s records • Accuracy –all account balances have been recorded correctly. Accuracy refers to 3 types of investment holdings that must be accurately recorded in the books. o Held to Maturity Securities – the entity has the positive intent and ability to hold the investment to maturity – reported at amortized cost o Held for Trading Securities – debt and equity securities that are bought and held for the purpose of selling them in the near term – reported at fair value with unrealized gains and losses reported in earnings. o Available for Sale Securities – debt or equity securities not classified as either of the above, reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity called “other comprehensive income” • Cutoff – all transactions should be recorded in proper period (purchases, revenue accruals etc) • Ownership (rights and obligations) – amounts reported as assets of the company represent property rights and amounts reported as liabilities reflect its actual obligations. • Valuation – ensuring proper application of GAAP especially with respect to assets / Accuracy – used to establish evidence that transactions for all account balances have been recorded correctly in financial records. • Presentation and Disclosure – ensuring accounting principles are properly selected to reflect economic nature of the transactions and applied and whether note disclosures are adequate. • Cutoff – all transactions recorded in proper period • Classification - transactions are recorded in the correct accounts. Management Assertions fall into 3 categories 1. Classes of Transaction and events for the period under audit (Income Statement) • Occurrence, Completeness, Accuracy, Cut Off, Classification 2. Assertions about account balances at the end of the period (Balance Sheet) • Existence, Rights and Obligations, Completeness, Valuation and Allocation 3. Assertions about Presentation and disclosure • Occurrence and rights and obligations, completeness, classification and understandability, accuracy and valuation |
© Accounting Scholar | Privacy Policy & Disclaimer | Contact Us |
