We'll back up just a little bit and talk about the definition of assertions. We'll talk about the key assertions in financial statements. And we'll talk about, what is entailed in the preliminary assessments of the risk of material misstatement, in these key financial statement assertion. And then finally, we'll move to the basic steps that are involved in verifying these financial statement assertions. So what is an assertion? Well, assertion is, if you look at Merriam-Webster, one of the principle definition is a confident declaration. A declaration with confidence, but without substantial assurance. So, I say that in a financial statement accounting example, revenues were $16 million this quarter, okay? That's an assertion. We will peel the onion on all of the sub assertions involved in that momentarily. In a financial audit, these independent knowers, the auditors, are looking at the promisers, management's assertions. And they are testing a set of assertions that management doesn't explicitly say all of these assertions that we'll cover in just a moment. And just a preview, if it were revenue, you'd be seeing, among other things, that of that $16 million in revenue, that one of the things that you'd be seeing, that that really exists. That's non-fictitious revenue. And you would also be seeing, as another example, that we've applied generally accepted accounting principles, in a way that that revenue figure is correctly valued. So you 2 sub-assertions existence of revenue, and evaluation of revenue already. And there's several more. But these assertions are not explicitly, they are implicitly made by management, any time you have financial statements. So here again is something that you're starting to open the curtain, to use a Wizard of Oz analogy, where it's, what's behind the curtain? You see the wizard in the Wizard of Oz, and there's this great oz guy, and he seems to be very powerful. But once you start opening the curtain and getting some details, you start saying I understand now what was really going on. And we know from the prior lesson that not all audits are equal because of materiality differences. And now we're seeing in this lesson, another key building block when an auditor says that the financial statements, in his or her opinion, are free of all material misstatement. They're really starting at this assertion level. Now, assertions can be categorized a lot of different ways, but two of the main attributes that I want you to think about for this course are the degree to which an assertion is monetary, versus non-monetary. And the degree to which it's a qualitative assertion, versus a quantitative assertion. And as it turns out, almost every financial statement assertion, even those denominated in dollars or pounds or euros, rupees, have not only a quantitative angle but also a qualitative angle. So let's think about these two dimensions, and see if we can populate what might show up in each of these quadrants. Let me give you an example of something that would be mostly monetary and mostly quantitative. A $3,000 certificate of deposit. That's a monetary assertion relatively quantitative. Is it entirely quantitative? No, because you're calling it a special type of deposit, it is a certificate of deposit. That's implicitly saying that it meets the criteria you need to be called a CD, and not just a regular passbook savings plan. And that's important because usually the rate of return on CDs is a tad bit higher. Another mostly monetary, mostly qualitative, assertion would be $10,000, historical cost of inventory. You are aggregating things in monetary terms. You're not saying, hey, that's a lot of inventory. No, you're saying, $10,000 of historical cost of inventory, mostly monetary, mostly quantitative. Is it 100% quantitative? No, it's not, because you have this adjective historical cost of inventory. I could also say the replacement cost of inventory. And for most organizations, the replacement cost in a period of inflation it's going to be higher, right? So, even these relatively quantitative, relatively monetary assertions, they do have some qualitative facets and it's really some non-monetary facets. But those assertions are some examples of ones that would belong in that quadrant. An example of relatively qualitative, relatively monetary assertions, would be materiality, a construct that we've talked about in a prior lesson. It's mostly monetary, and it's not mostly quantitative, it's mostly qualitative, and if you wonder why, go back to the definition of materiality. Something is material if it's large enough, either in magnitude or its nature, to influence the decisions of reasonable financial statement users. That's very qualitative judgement. It's not saying $10,000 or $100,000, or a million, okay? So materiality is fundamentally account qualitative construct, and auditors just happen to use quantitative benchmarks for ease of operational planning. Or instead of historical value of the inventory, you could say a fair value of inventory. And I don't put the dollar amount here, that would make it a little bit more quantitative as well. But I'm trying to emphasize the adjectives here, fair value of inventory. And then net income. Net income is qualitatively determined by all the rules and principles and generally accepted accounting principles, or International Accounting Standards. Let me go on a little bit further. A relatively non-monetary but quantitative assertion would be things like market share or, say, number of subscribers for your web application. Maybe you have how many people are signed up for Twitter, and maybe how many subscribers do you have for Fortune Magazine, either in the print or online space. Another relatively quantitative, non-monetary assertion would be jobless rates or unemployment rates. But even then that's not 100% quantitative, because they are rules and principles that govern who is not classified as in those people who are counted in the jobless rates. You may have seen this on the news, but once you're no longer consciously that we are looking for a job, you drop out of the count for unemployment. So sometimes the rate of unemployment will drop, just because people have ironically been out of work too long. How about mostly qualitative and mostly non-monetary? Well there you're getting into things like customer satisfaction, workforce quality. Now see the auditor usually does not directly spend most of their time auditing relatively qualitative, relatively non-monetary assertions. But the auditor needs to have a really good pulse, a really deep understanding of many of these, because they are precursors of some of the key, relatively quantitative, relatively monetary, assertions that appear all over the financial statements, okay? And a lot of the financial statement production process is taking a lot of qualitative information, and reducing it down to more monetary terms and more quantitative terms, if you think about it.
