 Hello and welcome to this session, this is Professor Farhad and this session we would look at CPA questions that deal with auditing, specifically the audit assertions. This is an important topic on the CPA exam as well as any auditing course. As always I would like to remind you to connect with me on LinkedIn if you haven't done so, YouTubers where you need to subscribe. I have 1,700 plus accounting, auditing, tax, finance as well as tutorial lessons. If you like my lectures, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people, connect with me on Instagram. On my website farhadlectures.com you will find additional resources. For example, I have an auditing course as well as many resource to pass your CPA exam. I strongly suggest you check out my website if you're interested in adding 10-15 points on your CPA exam or if you want to supplement your accounting courses. So let's take a look at this first question. Which of the following is an assertion under the category of classes of transaction? We have assertions that deals with transactions and we have assertions that deal with account balances. So you have to know which is which and you have to know the meaning of them because they're very helpful and once you understand them you're going to have a powerful tool to pass your CPA exam. So is it 1, 2, 3? Is it 1 and 2? All of them. So specifically we are dealing with classes of transaction. The first one is the cutoff. Do you know what a cutoff is? Well the cutoff deals with the timing. Did we record the transaction or the event in the proper accounting period? So this is what cutoff is. So did we push revenue for example from year one to year two? So this is year one and this is year two. So when we are concerned with cutoff, we are concerned that we push some revenue from year one to year two or did we push some revenue from year two to year one? Basically shift in revenues or shifting expenses. Well the cutoff deals with both understatement and overstatement. Would that deal with transactions? And the answer is yes. You could shift revenues and expenses. Those are transactions that affect income such as net profit, revenues and expenses. So yes, are they classes of transaction category assertion? And the answer is yes. Definitely one is in so we can eliminate A and we can eliminate the others. Completeness. What is completeness? Completeness means that old transactions, I just said the word, and events has been recorded. So here you are dealing with understatement. So did you record everything? You didn't keep anything out, you did not keep any expense out, you did not keep any revenue out. Well, this is completeness. So completeness is an assertion that deals with transaction, therefore two is in, therefore now we have one in two. And once you get to this point, you know the answer is must be one, two and three because one and two are in letter D. But let's look at occurrence. What is occurrence? And it's important that you understand the transaction. This means that the transaction or the event that actually occur and it belongs to the company. Here you are dealing with usually with overstatement. Because what happened is companies try to book revenues. Something happened, a transaction that occur, a transaction that happen, but it did not really happen. Usually you don't book expenses, but even if you book expenses, and if it did not occur, you are dealing with overstatement. So overstatement of revenue also is a presumption in any audit. That's why I said revenue. So definitely occurrence deal with the classes of transaction. Therefore the answer is D. The answer is D. So those are assertions that deal with classes of transaction. Now also we have assertions that deal with account balances. Which of the following is a financial statement assertion regarding account balances? So now we are dealing with account balances. Again it's important that you understand them. Is it one, two and three? So let's take a look at each one separately. The first one is rights and obligation. What is rights and obligation? When the company present their financial statements, they're implying that the assets that they hold is their assets, they have the right to the assets, and the obligation, the liabilities that they are showing is their liabilities. Is this an assertion that deals with account balances? Yes, we're dealing with assets and liabilities. Therefore one is in. If one is in, we can eliminate C and D. Now valuation. What is valuation? Valuation is basically, when you think of valuation, think of a dollar amount. It's the assertion that we are properly valuing our assets as well as our liabilities, basically putting the right dollar amount. For example, when we're dealing with a counter receivable, it's reported at not realizable value. When we're dealing with inventory, it's reported at LCM, when we're dealing with property plant and equipment, it's reported at historical cost unless it's impaired. So valuation deals with balances, account balances. So yes, two is in. Now all we have to find out is three is an option, is an assertion that deals with account balances. What is existence? Think of the word existence. Do something exist? Well, existence means you're claiming you have an asset. I want to see if it exists. I want to inspect it. I want to see it. So I'm inspecting, often time, it's physically inspecting the asset. Sometimes you have impenetrable assets, you just have to figure out how to make sure that they exist. But the point is, if it's a physical asset, think about existence as an assertion that deals with account balances. And the answer is yes. And usually, not usually, existence deals with overstatement. If it doesn't exist and you report on it, then it's an issue. So the answer is which of the financial statement assertion regarding account balances, all three deals with account balances, account balances. So the answer is B. So it's very important that we understand the difference between the classes of transaction and the account balances. And on my website, I do have a few lessons about this topic, very important topic for the CPA exam. Account receivable effect, one or more assertions, which of the following assertion relate to account receivable, net of allowance for doubtful account, which is mean net receivable existence or valuation. So we have to know the difference between existence and valuation. Existence for the account balances means, do the account receivable actually exist? And here we are looking at gross balance. And the question is not about the gross amount, because remember, account receivable minus the allowance equal to net receivable. So when we are dealing with existence, we are dealing with account receivable. But the question is about this number, not account receivable. The questions that we are being asked is net receivable, account receivable, net of the allowance. So once one is out, so A is out, C is out. Now all we have to find out is two, which is valuation, deals with the account receivable net of the allowance. And remember, what did we say valuation? Valuation deals with the dollar amount. Here we are asking, is account receivable properly valued at net realizable value? Is this a valuation assertion? And the answer is yes. Now how do you make sure it's properly valued? You check your credit policies. You check to see how they estimate the allowance, so on and so forth. So yes, valuation is an assertion that deals with the account receivable net of the allowance. Therefore, the answer is B. Let's take a look at this question. Inventory that was bought right before the end of year one, but was incorrectly recorded in year two. So simply put, this is year one, and this is year two. So it was purchased here, but was not recorded until year two. Which assertion is affected in year one? So they're asking us, which assertion is affected in year one? Well, what happened in year one? In year one, we had a transaction here. We purchased inventory, but it was not recorded. So did we have all the transactions recorded? And the answer is no, we did not have it recorded. Therefore, completeness is definitely one of them, because we did not record all the transaction. It means our inventory and account stable, if we bought it on account, is understated, because they're not complete. Therefore, one is definitely, so two only is out, and D is out. So all we have to find out now is the second assertion existence applied to year one. Well, which assertion is affected? Is existence affected? No. Existence is not affected. We didn't even claim that we have it. Existence is basically is tested when you have an asset. They're telling you in the first statement that we did not even record it. Therefore, we don't worry about existence. Existence will be a concern in year two. Basically you are recording something, but it doesn't belong to year two. But they're asking us about year one. So if they're asking us about year two, existence will be the right answer for year two, because you are recording something in year two that should not have existed in year two. It should have been part of year one. So the answer for this is only one is only. Let's take a look at this question. Recalculation of invoice amount and inspection of certain document for authorization are all the procedures to test which of the following assertions. Here what we're doing is basically looking at the numbers, you know, footing and cross footing, taking the units times the selling price, just to make, to make sure the math is correct. So when we do so, what are we, what are, which, which, which searching are we, are we testing? Are we testing the cutoff or are we testing the valuation? Remember what is the cutoff? The cutoff is, is it in the proper, is the amount, is the, is the transaction in the proper period? Is this what we are doing here? No. What we're doing is the math computation. And remember when we said valuation, we said we're looking at the dollar amount, you're checking the math. So the answer is valuation, not cutoff. Therefore, the answer will be B here, because the cutoff deals with, is it in the proper period? Now, one will do, when we are doing so, we can look at the dates, then, you know, look at the record, but that's not what they're doing here. What they're saying is when we do the, when we do the inspection of certain document, recalculation deals with valuation. That's what you're doing. You are recomputing and making sure the transaction is properly authorized, but not the cutoff transaction. These topics are covered again in my auditing course, in my assertions. You could visit the website. I strongly suggest you do so to have more, to gain a better understanding of a very important topic that's covered on the CPA exam. As always, study hard, good luck, and stay safe during those coronavirus days.