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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

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