Gies College of Business at Illinois

Department of Accountancy

Audit Assertions

Module 6

Mark Peecher
Module 6 Lesson 1

Assertions
Lesson Overview
What is an assertion?
What are the key assertions in f/s
(financial statements)?
What is entailed in preliminary
assessments of the risk of material
misstatement in these key f/s
assertions?
What is/are the basic(s) of verifying
these f/s assertions?
Assertions

What is an assertion?
A confident declaration
A declaration with confidence, but without substantial
assurance, much less proof
In a financial-statement audit, auditors test a set of
assertions implicitly declared by management to financial-
statement users (e.g., investors)
Assertions Can Concern . . . .
Relatively Relatively
Quantitative Qualitative

Relatively
Monetary

Relatively
Non-
monetary
Assertions Can Concern . . . .
Relatively Relatively
Quantitative Qualitative
$3,000 CD Materiality
$10,000 Fair value
Relatively
historical of inventory
Monetary cost of Net income
inventory

Number of Customer
Relatively subscribers satisfaction
Non- Jobless Workforce
rates quality
monetary
Audit Standards on Assertions

International Standard on Auditing 315

Representations by management, explicit or otherwise, that
are embodied in the financial statements, as used by the
auditor to consider the different types of potential
misstatements that may occur.
Financial Statement Assertions
(PCAOB: AS No. 15)

Existence (or Occurrence)

Completeness
Valuation (or Allocation)
Rights & Obligations
Presentation & Disclosure
Assertions
Account Balance
Existence – assets, liabilities, and
equities exist (are not fictitious)
Completeness – all assets, liabilities
and equities have been recorded.
Rights & Obligations – the
accounting entity owns or controls the
rights to assets, and liabilities are
owed or obligations of the accounting
entity
Valuation – assets, liabilities and
equities are included at the
appropriate carrying values per an
acceptable accounting framework
(e.g., GAAP)
ISA 315, PCAOB AS15
Classes of Transactions and
Events
Occurrence – Transactions and
events have been recorded and
pertain to the accounting entity.
Completeness – all transactions and
events that need to be included in f/s
have been recorded.
Accuracy, Cutoff, & Classification –
amounts and other data have properly
recorded, within the appropriate
accounting period, and in proper
accounts
Presentation and Disclosure
(e.g., notes to f/s)
Occurrence – disclosed transactions
and events actually have occurred.
Completeness – all disclosures that
should have been included actually
have been included.
Rights & Obligations – disclosed
transactions and events pertain to the
accounting entity
Accuracy, valuation, and
understandability – Information in
notes is fairly stated and expressed
clearly.
A Set of Steps to Assessing
RMM of and Verifying Assertions

1. Identify assertion(s) being made

by asserter
A Set of Steps to Assessing
RMM of and Verifying Assertions

2. Assess and justify the

assertion’s risk of (material)
misstatement
How do we assess/justify this risk?
A Set of Steps to Assessing RMM of
and Verifying Assertions

3. Determine an attest objective for

verifying the assertion
i.e. a broad action statement of what
you will do
A Set of Steps to Assessing RMM of
and Verifying Assertions

4. Determine an attest procedure

that achieves the objective and
addresses the risk of misstatement
i.e. specify “what” evidence and “how”
you will use it
Example: Balance Sheet

Account Receivable: $5,000,000

1. Existence: all recorded receivables exist

2. Completeness: all receivables are recorded

3. Valuation: receivables are carried at the net realizable value

4. Rights and obligations: entity has rights to receivables

5. Presentation and disclosure: receivables are properly

presented and requisite disclosures are made
Module 6 Lesson 2

Financial Statement
Assertions
Pre-Lecture Reflection: Auditing Deferred
Revenue at Caribou Creek
Caribou Coffee Company

Deferred Revenue

“The Company sells stored value cards of various denominations. Cash

receipts related to stored value card sales are deferred when initially
received and revenue is recognized when the card is redeemed and the
related products are delivered to the customer. Such amounts are
classified as a current liability on the Company’s consolidated balance
sheets

Source: Caribou Coffee Company, Inc.; Form 10 K-A; Notes to Consolidated Financial Statements
https://www.sec.gov/Archives/edgar/data/1332602/000119312512164518/d333451d10ka.htm
Caribou Coffee Company
Deferred Revenue

The Company will honor all stored value cards presented for payment;
however, the Company has determined that the likelihood of redemption
is remote for certain card balances due to long periods of inactivity
(“breakage”). The Company estimates that cards which have had no
activity for 48 months are unlikely to be used in the future. In these
circumstances, to the extent management determines there is no
requirement for remitting balances to government agencies under
unclaimed property laws, card balances may be recognized in the
consolidated statements of operations.

Source: Caribou Coffee Company, Inc.; Form 10 K-A; Notes to Consolidated Financial Statements
https://www.sec.gov/Archives/edgar/data/1332602/000119312512164518/d333451d10ka.htm
Caribou Coffee Company
Deferred Revenue

The Company uses the redemption recognition method and recognizes

the estimated value of abandoned cards as a percentage of every
stored value card redeemed and includes the amount in coffeehouse
sales. Such amounts represent the Company’s experience regarding
unused balances related to stored value cards redeemed. The
Company excludes stored value card balances sold in jurisdictions
which require remittance of unused balances to government agencies
under unclaimed property laws. Breakage recognized was immaterial to
all periods presented.”

Source: Caribou Coffee Company, Inc.; Form 10 K-A; Notes to Consolidated Financial Statements
https://www.sec.gov/Archives/edgar/data/1332602/000119312512164518/d333451d10ka.htm
Caribou Example
Solution
Example of an Objective & an Audit
Procedure
Objective: Verify that all gift card liabilities are real
Audit procedure:
Vouch from gift card subledger to sales invoices/card sales.

In regular English, start by looking at the system or report that

summarizes all recorded liabilities. Pick a sample of recorded
liabilities and work backwards to match the report details for each
item in the sample to a physical or electronic sales invoice/record.
Match Objective with
Appropriate Assertion
Objective 1: Verify that
unredeemed gift cards are
recognized as deferred revenue not
revenue
Objective 2: Verify that all gift card
balances are recorded
Financial Statement Assertions
1. Existence: all recorded receivables
exist
2. Completeness: all receivables are
recorded
3. Valuation: receivables are carried
at the net realizable value
4. Rights and obligations: entity has
rights to receivables
5. Presentation and disclosure:
receivables are properly presented
and requisite disclosures are made
Audit Procedure 1

1. Select a sample of sales

invoices and match to gift card
subledger or general ledger to
ensure the sale was recorded
Audit Procedure 2

2. Examine/Reperform
management’s hindsight analysis
of abandonment
Audit Procedure 3

Audit procedures:
3. Test a sample of gift card
balances for unclaimed property
compliance
Audit Procedure 4

Audit procedures:
4. Select a sample of sales
invoices and match to gift card
subledger or general ledger to
ensure the sale was recorded in
the proper account
Match Objective with
Appropriate Procedure
Objective 1: Verify that
unredeemed gift cards are
recognized as deferred revenue not
revenue
Objective 2: Verify that all gift card
balances are recorded