A financial statement assertion is a representation made by management in the financial statements about the organization’s economic resources, obligations and changes in its owner’s equity. It is expressed either directly within the statements or through notes accompanying them. Generally accepted accounting principles (GAAP) require organizations to make assertions about their financial reporting that enable those who use the information to make decisions about them. These assertions provide valuable insight into a company’s performance, assets and liabilities.
The two categories of financial statement assertion are “assertions related to presentation and disclosure” (the appropriateness of titles and caption used in the reports) and “assertions related to account balances” (accuracy of information relating to each account). Assertion related to account balances can be further divided into five subcategories i.e., existence, ownership/legal matters, completeness, rights and obligations, valuation/allocation/measurement accuracy. Thus financial statement assertions contain assertions related to presentation/disclosure as well as asserts related to account balances altogether known as Assurance Assertions.
Which of the following is not a financial statement assertion made by management?
Answer: The price of a cup of coffee at a certain cafe
Types of Financial Statement Assertions
Financial statement assertions are representations or declarations related to a company’s financial statements. Such assertions are made by management to provide faithful representations of the financial position, performance and cash flows of the company and are the basis of all financial reporting. This article will explain the different types of financial statement assertions and why they are important.
The completeness assertion is an accounting assertion made by management to confirm that all transactions are recorded in the financial statements. Management assures that a company’s financial statements include all of the necessary elements so that they paint an accurate picture of the company’s financial standing. This is especially important when calculating income from accounting periods, changes in equity and detailed costs or expenses associated with operations.
This assertion is closely related to other assertions related to accuracy, underlying data and existence, such as accrual basis and going concern assertions. These assertions, combined with the completeness assertion, allow for a comprehensive assurance about the reliability of a set of financial statements over time.
When making this assertion, management must ensure that all pertinent documents—such as invoices, purchase orders and accounts payable charges—are properly classified and reported under the correct accounts on their financial statements. Companies typically use exception-based reporting to identify items which don’t match pre-determined criteria or thresholds. Through these processes companies can ensure accounts are both complete (in terms of all transaction types being captured) and accurate (in terms of having no erroneous transactions). In addition to establishing internal control over accounting processes and technical accuracy assurance, companies should also focus on governance/process controls that help ensure adequate oversight over reporting accuracy.
is one of the major categories of financial statement assertions made by management when they report financial performance. It indicates whether recorded items actually exist in an entity’s books and records. A positive assertion of existence means that any transactions and balances reported in financial documents are real, valid, and allowable transactions or assets that are owned by the corresponding entity. This assertion helps to ensure the accuracy of a company’s accounts and maintains the integrity of the recorded financial information.
Examples of existence assertions include:
- Cash on hand
- Inventory levels
- Long-term investments
- Accounts receivable
- Property and equipment possessions
- Tangible assets such as buildings and land held for ownership or investment purposes
- Intangible assets including patents or trademarks
- Liabilities such as debt obligations or loan payments due from customers
- Other equity accounts like owner’s contributions or retained earnings accounts
Which of the following is not a financial statement assertion made by management? Answer: Market share is not a financial statement assertion made by management – it does not typically fall within a company’s books and records.
Rights and Obligations Assertion
One of the financial statement assertions made by management is the Rights and Obligations Assertion. This assertion focuses on a company’s obligations to its creditors, suppliers, employees and other stakeholders such as shareholders.
Management is responsible for providing assurance that all liabilities have been accurately recorded in the financial statements. This requires a review of any contractual agreements, including employment contracts and collective bargaining agreements. Management must also monitor commitments such as loan agreements to ensure they are fulfilled according to agreed terms. Additionally, companies must maintain adequate insurance coverage.
The management assertion also holds them responsible for ensuring that equity has been properly reflected in the financial statements. This involves the careful analysis of all transactions concerning cash or investments and recording those transactions according to established standards. Further consideration needs to be given to any transactions where related parties may be receiving preferential treatment compared with other business partners.
Finally, management must ensure that their reporting fulfills all legal requirements concerning creditors’ rights and obligations as well as any applicable regulations from professional organizations or government authorities such as securities regulators.
Valuation or Allocation Assertion
The Valuation or Allocation Assertion is one that relates to the selection and application of accounting values when taking into account a variety of elements, such as depreciation calculation techniques, useful lives for assets, inventory valuation methods and impairment tests.
Valuation or allocation assertions take into account the risks posed by management’s decisions related to accounting choices that may have significant effects on financial information. Responsible entities typically assess certain values with respect to their estimates taking into account past performance and market conditions, as well as any other data at their disposal which may give insight about the future performance potential of an asset or liability.
Those responsible for financial reporting must have an in-depth understanding of any influencing factors it considers when assessing these allocations or risk facing misstatement in their financial statements.
Presentation and Disclosure Assertion
Presentation and disclosure assertions relate to the way information is presented in the financial statements. The following are examples of typical assertions in this category:
- Completeness: All transactions, events and activities that should be included in the financial statements have been included.
- Accuracy: Financial statement amounts are a reasonably accurate representation of their underlying transactions, events and activities.
- Classification: Assets, liabilities, equity, revenues and expenses are properly classified according to generally accepted accounting principles (GAAP).
- Disclosure: All disclosures required by GAAP have been included in the financial statements.
Which of the following is not a presentation or disclosure assertion made by management?
A) Valuation assertions
Which of the following is not a financial statement assertion made by management?
A financial statement assertion is a representation made by management about the information contained in a company’s financial statements. These assertions are often made in the form of a written statement. Management assertions are typically made about the occurrence, completeness, accuracy, rights and obligations, and valuation of the financial statement items.
However, not all assertions made by management about a company’s financial statements are financial statement assertions. This article will explore which of the following are not a financial statement assertion made by management:
Going Concern Assertion
The going concern assertion is not a financial statement assertion made by management, but rather an underlying assumption of most financial statements that assumes the business that has prepared the financial statements will remain in operation for the foreseeable future. This allows users of these financial statements to analyze and use the reported values for making long-term decisions, such as investments or capital projects.
In addition to the going concern assumption, there are three other basic assertions or claims that have been identified by auditors as essential for creating valid and reliable financial statements:
- Accuracy Assertion: Financial statement amounts must accurately reflect transactions and balances reported.
- Cutoff Assertion: All transactions must be recorded within the appropriate period in order to maintain faithful representation of performance during those periods.
- Existence Assertion: All assets, liabilities and equity securities must exist at the date reported on a balance sheet.
Therefore, going concern assertion is not a type of assertion made specifically by management but is instead an assumption underpinning all properly prepared financial statements.
Accuracy Assertion is not a financial statement assertion made by management. Financial statement assertions are written representations by management that provide the underlying assumptions and obligations related to the preparation of the financial statements. This can include assertions such as existence, completeness, accuracy, occurrence, valuation and allocation, rights and obligations, disclosure and presentation.
The accuracy assertion confirms that there are no misstatements in the financial statements either due to an omission or incorrect recognition or measurement of transactions or balances as of a particular reporting date. This assertion implies that all measurements in the financial statements such as liabilities reported are true and fair at a particular reporting period.
The primary users relying upon an accuracy assertion may be investors since depending on the extent actual numbers differ from what is stated in the financial statements. Other users may be analysts relying on accurate numbers for financial analysis purposes such as calculating ratios to determine liquidity position etc.
Financial statement assertions are representations made by management, through accounts in the financial statements. These assertions can be classified as existing, completeness, accuracy, cutoff, validity and rights and obligations.
Cutoff assertion is a financial statement assertion that relates to transactions or events that should be recorded in the correct accounting period. Any possible misstatement could occur if transactions or events are not recorded in the correct period; for example, revenue that was earned this year being recognized as revenue of last year. The audit objective of cutoff assertions is to ensure that all transactions or events have been included in the proper accounting periods.
The other five financial statement assertions include:
- Existing assertion (related to identification and existence of assets and liabilities).
- Completeness assertion (related to recording all relevant transactions).
- Accuracy assertion (related to measurements of assets and liabilities at appropriate amounts).
- Validity assertion (related to recognition of assets, liabilities and disclosure items at appropriate amounts).
- Rights and obligation assertion (related to determination that assets are those of the company).
A financial statement assertion is a representation made by management concerning the characteristics of an entity’s financial position and performance. It is a statement that relates to one of four primary classifications: existence, rights and obligations, valuation, or allocation assertions. The value of the entity’s assets, liabilities and transition type are described in financial statements through these assertions.
- Existence assertion states that items exist such as inventory, accounts receivable and prepaid expenses.
- Rights and Obligations Assertion states that the entity has complete rights to all its assets as well legal obligation for all liabilities presented in its financial statements.
- Valuation Assertion validates the accuracy of an amount listed on the asset or liability account post depretion or accrual basis respectively.
- Allocation Assertion relays data about how revenues and expenses are allocated among different accounts when making closing entries for the appropriation of income for a specific period.
Classification Assertion is not a Financial Statement Assertion made by management as it deals with categorizing transactions into expense income categories rather than characterizing an entity’s financial position or performance.