Practice Question 1

The following account headings appear in the trial balance of Safe-T (Pvt) Ltd.

• Accounts receivable $2 631 981

• Sales $9 246 124

Whilst briefing your audit team on the upcoming audit of Safe-T (Pvt) Ltd you asked a first-
year trainee who had just completed his undergraduate studies to explain the assertions
applicable to the two account headings above.

After some hesitation he responded as follows:

Accounts receivable

Accuracy: All credit sales have been accurately recorded.

Existence: The possibility does exist that debtors included in the $2 631 981 will not pay the
amount they owe.

Obligation: All debtors included on the list have agreed to pay and therefore have an
obligation to do so.

Validity: Only genuine debtors have been included in the balance of $2 631 981 i.e. there are
no fictitious debtors.

Sales

Recognition: All revenue in the form of sales has been recognized.

Collectability: The proceeds from all sales recorded have been or will be collected.

Valuation: The amount of $9 246 124 represents the total value of sales made.

Rights: Safe-T (Pvt) Ltd has the right to include all sales even though some debtors may not
pay.

Required Indicate whether your first-year trainee’s understanding of financial statement

assertions is good, reasonable or weak. Justify your answer L.H., F&A, BMSE, 202
Based on the information provided, the first-year trainee's understanding of financial
statement assertions can be considered reasonable. The trainee has correctly identified
several assertions relevant to the accounts receivable and sales account headings,
although some additional clarification and elaboration may be needed. Here's a
breakdown of their responses:

Accounts Receivable:

1. Accuracy: The trainee correctly states that all credit sales have been accurately recorded.
This assertion focuses on the accuracy of the amounts recorded in the accounts receivable
balance.

2. Existence: The trainee acknowledges the possibility that some debtors included in the
accounts receivable balance may not pay the amount they owe. However, it is important to
note that the existence assertion primarily relates to whether the recorded accounts receivable
balances represent valid claims against customers at the balance sheet date.

3. Obligation: The trainee states that all debtors included on the list have agreed to pay and
therefore have an obligation to do so. This assertion is not entirely accurate, as the existence
of an accounts receivable balance does not necessarily mean that all debtors have agreed to
pay. The obligation assertion focuses on whether there is a legal or contractual obligation for
the debtor to make payment.

4. Validity: The trainee correctly states that only genuine debtors have been included in the
accounts receivable balance. This assertion is concerned with ensuring that the accounts
receivable balance does not include fictitious or fraudulent amounts.

Sales:

1. Recognition: The trainee correctly states that all revenue in the form of sales has been
recognized. This assertion focuses on whether sales transactions have been properly recorded
in the financial statements in accordance with the applicable accounting standards.

2. Collectability: The trainee states that the proceeds from all sales recorded have been or will
be collected. However, it is important to note that the collectability assertion primarily relates
to whether the recorded sales are collectible or whether an allowance for doubtful debts is
necessary.
3. Valuation: The trainee states that the amount of $9,246,124 represents the total value of
sales made. This refers to the valuation assertion, which focuses on whether the sales are
recorded at the appropriate value, typically the net realizable value.

4. Rights: The trainee correctly states that Safe-T (Pvt) Ltd has the right to include all sales,
even if some debtors may not pay. This assertion ensures that Safe-T (Pvt) Ltd has the legal
right to recognize revenue from the sales transactions.

In summary, while the trainee's understanding of financial statement assertions is reasonable,

there are a few areas where further clarification and elaboration would be beneficial,
particularly regarding the existence and collectability assertions for accounts receivable.