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
• 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