acct 406 (audit) exam 1 ABC

What does the occurrence assertion say?

Recorded or disclosed transactions and events have occurred and pertain to the entity

What is occurrence sometimes referred to as?

Validity

What is occurrence in simple terms?

What's recorded in the books occurred

What are three examples of occurrence?

1. Sales actually occurred (are valid sales)

2. Expenses recorded represent valid charges

3. Recorded cash disbursements are for goods and services actually received

What does the existence assertion say?

Ending balances of assets, liabilities, and equity interests included in the FS exist at the FS date

Existence pertains to __________, while occurrence pertains to _____________.

Account balances, transactions

What is existence in simple terms?

What's recorded in the books exists

What are some examples of existence?

1. The cash reported actually exists

2. The buildings recorded in PP&E exist

3. Receivables are recorded when goods are shipped

What does the completeness assertion say?

Transactions, events, assets, liabilities, equity interests, and related disclosures that should have been recorded have been recorded.

What is completeness in simple terms?

Everything that should be recorded is recorded.

_________ is the opposite of occurrence & existence.

Completeness

What are some examples of completeness?

1. All expenses incurred have been properly reflected in the company's records

2. Existing cash disbursement transactions are recorded

3. There are no unrecorded receivables

4. All required disclosures about sales and receivables have been made.

What does the rights & obligations assertion say?

The entity holds or controls the rights to the assets included in the FS, and liabilities are the obligations of the entity.

What is rights & obligations in simple terms?

The company "owns" the reported assets, and "owes" the reported liabilities

What are some examples of rights & obligations?

1. The cash reported is the company's cash

2. Receivables are not factored

3. The mortgage is owed by the company

4. The company actually owes lease liabilities recorded

5. There are no liens or other restrictions on accounts receivable

What does it mean to factor receivables?

Putting up your receivables as collateral for a loan (they are no longer yours)

What does the accuracy assertion say?

Amounts and other data relating to recorded transactions, events, assets, liabilities, and equity interests have been recorded appropriately

What is accuracy in simple terms?

Items are recorded/calculated correctly.

What are some examples of accuracy?

1. Sales transactions have been recorded at the correct amounts

2. Sales discounts applied to major customers are calculated correctly

3. Costs to install a significant asset are reflected in the value recorded to the new asset

What does the valuation & allocation assertion say?

Assets, liabilities, and equity interests are at appropriate amounts after any resulting valuation or allocation adjustments are appropriately recorded

What is valuation & allocation in simple terms?

Items are recorded at the appropriate value

What are some examples of valuation & allocation?

1. There is adequate provision/allowance for uncollectible accounts

2. Equipment is being depreciated using the appropriate method

3. Inventory is recorded at lower of cost or market

What does the cutoff assertion say?

Transactions and events have been recorded in the correct accounting period

What is cutoff in simple terms?

Items are recorded in the proper accounting period (typically year or quarter)

What are some examples of cutoff?

1. Cash disbursement transactions are recorded on the correct dates (think bank reconciliation - outstanding checks and deposits in transit)

2. Sales transactions have been recorded in the proper period

3. Sales made with FOB Destination terms have not been recognized if shipped on 12/30 with 3-day shipping terms

What does the classification assertion say?

Transactions, assets, liabilities, and equity interests are recorded in the proper accounts

What is classification in simple terms?

Items are recorded in the proper account

What are some examples of classification issues? (less detail)

1. R&M capitalized instead of expensed

2. Material credit balances in AR

3. Other income included in sales revenue

What are some examples of classification? (more detail)

1. Interest income a construction company earns is not included in operating income

2. All accounts in the A/R Trial Balance are expected to be collected within one year

3. Sales transactions have been recorded in the appropriate accounts

What does the authorization assertion say?

All transactions and events have been properly authorized

What is authorization in simple terms?

Transactions requiring approval have been approved

What are some examples of items requiring authorization?

1. Customer credit

2. Returns & refunds

3. Inventory write-offs (spoilage/damage)

4. Uncollectible accounts

5. Sales discounts

6. Major purchases/contracts (board approval)

What are some examples of authorizaiton?

1. Returns greater than $1,000 are authorized by a manager

2. Credit granted to customers is approved by the sales manager

3. Customer terms that differ from the standard payment terms of the company are approved by the sales manager

What does the presentation assertion say?

Transactions, events, assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework

What is presentation in simple terms?

Disclosures are:

1. Clearly described

2. relevant & understandable in the context of the reporting framework

3. Appropriately aggregated or disaggregated

What are some examples of aggregation (presentation)?

1. Related party sales included in sales on IS if actual sales

2. Related party receivables from normal sales in trade receivables on BS

What are some examples of disaggregation (presentation)?

1. Related party sales disclosed in notes because to related party.

2. Related party receivables from normal sales disclosed in notes

3. Related party receivables outside of the normal course of business (note receivable) separated in BS and disclosed

What is an example of presentation?

Review inventory on the balance sheet and notes for proper classification among raw materials, WIP, and finished goods

What is the disclosures assertion for occurrence and existence?

Disclosed events and transactions have occurred and pertain to the entity

What is the disclosures assertion for completeness?

All disclosures that should have been included in the FS have been included

What is the disclosures assertion for accuracy and V&A?

Financial and other information is disclosed fairly and in appropriate amounts

What is the disclosures assertion for classification?

Items are reported in the proper accounts

What is the disclosures assertion for presentation?

Same as presentation in simple terms