 Hello and welcome to this session in which we will discuss a very important topic and that's management assertions, specifically management assertion that deals with auditing. So what is management assertion? It's what management is claiming. Assertion is a claim and that claim could be implicit or implicit. What are they claiming? They're claiming something about their financial transactions, account balances and disclosures that appears in the financial statements. So management make assertions, our job is to attest, is to audit these assertions, audit these claims. Now assertions are based on the financial framework being used. Now the U.S. framework could be different than IFRS, for example in the U.S. we use U.S. gap, somewhere else would use IFRS. Now why would the auditor have to have a good understanding of the assertion? Because to perform a quality audit you have to understand the assertions because from the management assertion we derive, we write our audit objective. So what are the assertions that the company is making? Let's test them. Testing them is what determines our audit objective. Basically what we're doing simply put in a nutshell, we are attesting to the management assertions. That's why assertion is an important topic in the real world because if you are doing an audit, believe it or not, the terminology I'm going to be using here today, you will see those in your audit program, it's being used and that's why it's heavily tested on the CPA exam and for you to understand how we collect evidence, you have to know or understand assertions first because the type of evidence that we choose is based on the assertion we are trying to test. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Now we have the PCAOB, AICPA, International Auditing Standard. We have three sets of rules. Here's the good news, AICPA and the International Auditing Standard are basically the same and the PCAOB and AICPA are very similar. So the PCAOB have a one set of assertions and five category of management assertion and those are existence or occurrence, completeness, valuation or allocation, rights and obligation, end presentation and disclosure. The AICPA and the International Auditing Standard describe three sets of assertions, classes of transaction and event, account balances, end presentation and disclosure. Now in your textbook and your CPA review course, they might say you only have two sets of assertion and what they do, they take presentation and disclosure because presentation and disclosure applies to the classes of transaction. Presentation and disclosure applies to the account balances, that's fine as well. So simply put two or three, it doesn't really matter but the way they do it, they break it into classes and account balances and don't worry, they're basically the same because classes, account balances, they're going to go back to the same assertions. They break them down differently and I'm going to break them down for you, it's not a big deal but you will see how it works. Terminology might differ a little bit but the concept is the same and at the end of the recording I will map the AICPA to the PCAOB. So this way you see what I'm talking about once all said and done. Now the AICPA transaction related assertions deals with what? Deals with management making assertion, making claim when they present the income statement. When they present the income statement, they're making claim about transaction that dealt with those income statement. What are those claims about the income statement or transaction related assertion? One is occurrence. What is occurrence? The transaction that you are seeing actually exists. Well, did the sale took place? Was the expense incurred? They're claiming it happens if they're showing it to you. Now your job is to collect evidence to determine whether it happens or not. It happened or not. Completeness. What are they claiming? What are they asserting? They're asserting that all sales, all expenses has been accounted for, recorded. Did we record all sales and expenses? The risk maybe of hiding some expenses, hiding some revenues. I don't know. Did we account for everything? They're saying they did because that's the implicit claim that they made. That's the assertion. Our job is to collect evidence to test that claim. Accuracy. Recorded transaction are stated at the correct dollar amount. Is the transaction recorded at the proper amount? Well, we have to look at transaction. We have to look at evidence. We have to look at invoices. We have to look at bills, vendors, accounts to see if the amount is indeed 245, whatever that amount is for sales or purchase. Posting and summarization. Recorded transaction are properly included in the master file and correctly summarized. Did we add up all the trends, all the sales? And when we add up all the sales, do they tie up to the sales? So if we add up 1.5 million in sales, is the general ledger or the master file showing that number? Classification. Well, what does that mean? Transaction included in the client's journals are properly classified. For example, when we process a transaction and it's R&D, we debited R&D and we credited cash. We did not debited repair and credited cash because this is an R&D. If we debited repair, well, it's misclassified. We did not use the proper debit and the proper credit. Timing, cutoff or periodicity assertion. Did we, did we record the transaction and the proper period on the proper date? Remember, what we know about accounting, the artificial life of the company is broken down into period, period one, period two, so on and so forth. Once the transaction recorded in the proper period, we did not defer any expenses. We did not defer any revenue. We're not backdating as well. So simply put, your job as auditor is to collect sufficient appropriate evidence about all these assertions before you are comfortable to claim that the account is fairly stated. Simply put, when we have an assertion from the assertion, we generate the audit-related objective. And that audit-related objective could be general and specific. Then our job is to create an audit program, audit steps that can test that assertion. And to illustrate it with a more practical example, we look at sales because sales is a class of transaction. When the company sales, when the company claims we have occurrence, our general-related objective is occurrence. Our specific transaction-related audit objective is this. Recorded sales are for shipment to real customers. Now we have to collect evidence to see whether those sales are for actual customers, that they actually occur. Completeness, the company is claiming, asserting that they accounted for all the transaction. Where our job is to do what? Collect evidence to see if we capture all the sales and also all the related disclosure are included. Accuracy. Well, accuracy, simply put, is the amount accurate. Recorded sales are correctly built and recorded disclosure in the footnotes are correctly measured and described. Well, every transaction has a dollar amount. Is that dollar amount correct? We need to test for that. Posting and summarization. Again, did we add up foot all the transaction and tie them to the general ledger for sales? Classifications. For example, for sales, we could have sales revenue, rental revenue, consulting revenue, our sales properly recorded, classified in the proper account. Cut off, which deals with timing. Is the sales transaction recorded in the proper period? And obviously we have presentation. Here presentation, we want to make sure that the notes and the disclosure are presentable, relevant, understandable. We have to explain our revenue recognition policies, so on and so forth. Now we're going to move from transaction to balance and presentation audit objective. Remember, transaction deals with the balance sheet. Balance accounts deal with assets, liabilities and equity. Now management is making the following assertion when they present assets, liabilities and equity. Accounts, not transactions. Existence. Notice, we don't use the word occurrence for accounts. We use the word existence because occurrence is for transaction. Is the amount included actually exist? For example, the assets. They're claiming they have three, five million, 10 million worth of buildings. Who do they actually, those buildings actually exist? Trucks, they have a balance for that asset. Does it exist? Are they real? Completeness, did they account for older assets? Did they account for older liabilities? Maybe they're hiding some debt. They did not account for everything. Our job is to collect evidence about those accounts, about those completeness. Accuracy, which is called valuation as well, is the amount included or stated at the correct dollar amount. Did we include all the necessary cost when we bought inventory and fixed asset? Do we have the proper cost for those assets? Classification, amount included in the client listing are properly classified. Classification is easy for balances because we're dealing with assets and liabilities. They could be either current or non-current. Are they in the proper, are they classified on the proper balance sheet? Cut off, especially transaction near the end of the balance sheet. Are they recorded in the proper period? And we talk about inventory shortly. Is it FOB shipping? Did we buy it? If it's FOB shipping, as soon as we buy it, that's really ours. FOB destination, it's not our inventory until we receive it. It makes a difference. And you'll be surprised, based on my observation, to notice how many questions about FOB shipping, FOB destination in the MCQs, as well as in simulations that the AI CPA tests you on. Detailed tie-in. Basically, what's detailed tie-in? It's the same thing as summarization and posting. Detailed and the account balances agree with the related file amount or foot to the total and the account balances and agree with the total. Did we add up the total correctly? Then posted to the appropriate general ledger or master file. Realizable value, our asset included at the amount estimated to be realized for example, a counter-receivable inventory, an RV, LCM, rights and obligation. Assets are owned or controlled by the entity. Do we have rights and obligation, rights to our assets and do the obligation that we have truly our obligation? As our liabilities indeed our liability. Once again, we cannot say an asset or a liability is fairly stated until we go over all these assertions. And to illustrate the point, we're gonna work with inventory. Remember, we're gonna be making assertion about inventory and have a general and specific audit-related objective. For example, when we claim that the inventory exists, the general balance-related objective is existence. The specific one, well, all inventory recorded actually exists or do we have numbers but we don't have that inventory though they actually exist. Completeness, did we account for all the inventory? Was all the inventory accounted for? This is the specific related objective. Accuracy, is it correct? Is the perpetual record agree with the item physically on hand? Okay, we counted them, we counted all. That's fine, so they exist and we accounted for everything. Now, is the number correct? Is the number correct? Four, detailed time in. Well, we counted all the inventory, we added up. Now, does it match to the inventory balance? The general ledger, does it tie to the general ledger? If it doesn't tie, we have a problem. We have to check that. Realizable value. Do we have to write down any inventory? Is any inventory absolute? Because if we count them and it's there and the cost is correct, but the inventory itself lost some utility, we have to write it down, was it written down? Cutoff, is the inventory that we counted supposed to be in this period? And here we have to be careful about FOB shipping, FOB destination. Notice FOB shipping, FOB destination deals with sales, deals with inventory as well. Classification, for a manufacturing company, you could have many types of inventory, raw material, work and process, or finished goods. Is the inventory properly classified? Rights and obligations, that's another assertion. Well, what does that mean? Does the company have a title? No inventory is pledged as collateral. And of course, we have presentation and disclosure basically the notes are presentable, relevant and understandable. Simply put, did we disclose which accounting method we are using to account for our inventory? So all of these are important, not important, they're all needed to make sure inventory is fairly stated. We have to check all these assertions, okay? Simply put, for example, completeness, we ask the, simply put, the completeness could be a question asking management, did you provide us with all the inventory? If they say yes, and we assume they did, then there is no reason to question this. That's it, we are done with completeness. Unless there are some steps we have to undertake, if we believe they're hiding some inventory, then we have to carry more steps. But usually completeness is not an issue for inventory, it's usually existence. Or could be rights and obligation as well. Again, you would learn about those later on when you would learn about the inventory and purchasing cycle. What's more important? They're all important, they're all important, but what's more important than others depending on the account that you're auditing? And that's something you would learn about later. But that's why you have to understand the basic concept of an assertion. Now we're gonna go back and when I started, I told you we have the PCAOB and we have the AICP and the International Auditing Standard, now what I'm gonna do, I'm gonna map the AICPA to the PCAOB. And simply put, this is how it works. Those are the PCAOB five classes of assertion that deals with transaction, balances, and related disclosure. The AICPA, what they do, they break it into transaction, separately and related disclosure, and account balances and related disclosure. But basically the same. PCAOB, they have existence and occurrence together. AICPA said we have occurrence for transaction, existence for the account balances, completeness is for all, valuation or allocation, PCAOB, accuracy, classification and cut off AICPA for the transaction, accuracy, valuation and allocation and classification for the account balances. Rights and obligation, we always have to make sure we have rights and obligation to our assets and liabilities. It doesn't apply to transaction. And we always have to present and disclose assets, liabilities, equities, revenues, expenses, all accounts. So presentation and disclosure applies to everything. And that's why at the beginning I told you, you could just say two, because presentation and disclosure apply to all of them. What should you do now? You have to understand assertions inside out. Inside out, what does that mean? Go to far hat lectures, work, more MCQs, look at more examples which I work to help you understand this topic. You are investing in your career. Assertion is an important topic, whether you are in the real world or on the CPA exam. And that's why they tested on the CPA exam because they know you need it. You cannot conduct an audit without understanding because this is what you are doing. You are looking at assertions and especially in an actual audit program in the real world. They have these assertions as I just showed it to you. And there's questions and you have to ask the questions. Yes, no, so on and so forth. Study hard. Your CPA exam is important. Your education is important. Good luck. I'm always here to support you and stay safe.