Assertions Part III

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From the course by University of Illinois at Urbana-Champaign

Auditing I: Conceptual Foundations of Auditing

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University of Illinois at Urbana-Champaign

Auditing I: Conceptual Foundations of Auditing

11 ratings

This course provides an intensive conceptual and applied introduction to auditing in society. It focuses on concepts and applications related to financial-statement auditors’ professional responsibilities as well as major facets of the audit process including risk assessment and audit reporting. In the U.S. financial-statement audits and related services generally are provided by Certified Public Accountants (CPAs). To succeed in this course, you should anticipate engaging in critical thinking and thoughtful communication about audit professionals' decision environments, decision processes, and deliverables. Additionally, you should understand the macro-level learning objectives in each of the course's weekly modules.

From the lesson

MODULE 6: Audit Assertions

Assertions Part I8:57

Assertions Part II6:53

Assertions Part III4:39

Assertions Part IV11:22

Assertions Part V5:31

Meet the Instructors

Mark E. Peecher, PhD, CPA
Associate Dean of Faculty and Deloitte Professor of Accountancy
Department of Accountancy

So that was the basic assertions.

Let me present a little bit more comprehensive table and this

would be a good table for you to basically memorize.

I really don't like memorization, as it's not deep learning,

but sometimes you have to know basic anatomy.

Physicians need to know all of the bones,

an auditor needs to know all of the assertions.

You can't be a CPA because simply you know assertions,

but if you don't know the assertions,

you're not going to be a CPA.

So what you have here,

is the account balance assertions,

really pertain to balance sheet accounts.

Classes of transactions and events,

that's really more of your income statement and statement of cash flow accounts.

Presentation and disclosure,

sometimes these footnotes that you see in financial statements are exceedingly complex,

and so you want to make sure

that disclosed transactions actually have occurred and you want to make

sure that all disclosures that should be made, are made.

An easy example here is a contingent liability.

If you understand gap,

there are of course lawsuits are the cost of doing business these days.

Let's suppose that you are Chipotle.

If you know anything about Chipotle,

their food certainly taste good, but they've also had some supply-chain problems.

They've had a number of cases of people who have dined at Chipotle

becoming ill as a result of something in the supply chain.

There may have been some cases of just a store's not being clean.

This is not a slam on Chipotle,

it's just something that they have to deal with.

One thing they have to think about is well, if I, Chipotle,

if we are sued by customers,

how large of a liability,

if any, must we present in our financial statements?

Well, you may well know the gap here.

You're talking about a situation where if the amount of

the estimated litigation cost is estimable and probable, you have to book it, right?

If you have an estimable legal liability claim,

but it is not probable, but rather

less likely falling in the range of reasonably possible,

you have to disclose it in the notes.

Now if it's remote,

you don't have to book it and you don't have to disclose it.

But a lot of these legal claims fall in that space of not being

probable, but being in fact reasonably possible and still being estimable.

When you then disclose the nature of that liability in the footnotes,

there's actually a number of things that need to be carefully monitored by the auditor.

And usually the auditor will rely on a lawyer's letter from the client,

but also maybe gets a third party lawyer,

sometimes in their own firm, to look at this as well,

making sure that they're characterizing the nature of

this litigation liability appropriately and completely in the financial statements.

At the same time, management's not going to want to put some number in

the footnote because what sometimes will happen, any number you put in the footnote,

could become the floor in actual settlements.

So you'll see a reluctance to do that, for a lot of these contingent liabilities.

Rights and obligations, are you talking about

inventory on a consignment basis, being held-on consignment?

And then accuracy valuation and understandability,

information and notes fairly stated and expressed clearly.

The presentation and disclosure,

sometimes the basic financial statements, it's going to be 4 or 5 pages,

and the financial statements including the footnotes could be 40 or 100 pages.

Those footnotes are actually where the auditor is earning much of the audit fee.

Footnotes are incredibly complex and there needs to

be special set of care, special care taken by the auditor to make sure presentation disclosure is attended to.

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