Enough sort of as practical, everyday language being used to talk about assertions. Let's look at what audit standard say. So, one of the most easy to understand set of assertions is international audit standards. What it says about assertions, is that it's a representation made by management, explicit or otherwise, that are embodied in the financial statements as used by the auditor to consider different types of potential misstatements that could occur. Okay. Now, the specific assertions, and these are going to be common across international standards and auditing and PCO-based standards are as follows for financial statement accounts. So this is an audit standard number 15 in the PCOB. So when you think of any account on the balance sheet, and really any account on the income statement as well. Although, when you start talking about the income statement, as I'll show you in just a second, there are a few other variations of these. But these are the building block assertions, the balance sheet assertions. So any account, cash, accounts payable, inventory, prepaid insurance, equipment, all of these accounts, you can ask the following. Does equipment exist? Does the equipment account completely, does it contain all of the equipment that should be in the account? Now, existence and completeness, they're sort of opposites of one another, and it's very important for you as an audit learner, to be audit you can be, sorry for that joke. You really need to differentiate between existence and completeness. Okay> Existence, let me just drive this home. Existence means are all the things that are in fact recorded in the financial statements, should they be recorded? Are they non-fictitious? Okay? So to test for existence, you would always want to start with the things that already are recorded in the books, and see if there's an underlying documentary, or better yet real physical, or as appropriate, an intangible, support base for those. So, you would basically start with the books and then look for something supporting what's in the books, and that's often going to be called a vouching test. Completeness, to test where the completeness of things that should be in the books, you're principally worried about things that are not on the client's books yet, that are not recorded in a way that they would be in the financial statements. So the most common error that rookie auditors make, is that they think they're testing for completeness by vouching from the things that are recorded. You would never want to do that. What you want to do to test completeness, you want to start earlier in the process, when the transaction or financial event that triggered the asset or the liability originated, and you want to see whether the client's information system captured that information and then rolled it up into the financial statements. So what you would do, is not start with the books and vouch them for something before, no you would start earlier, and you would trace from these original transactions to the books, and making sure that they are in the books. So suppose you were really worried about environmental liability. So you could actually look at your client, see where they have business operations, where there could be rivers that need to, say, be cleaned up, where they could be issuing toxins into these rivers. And you could actually have, on a sample basis, some experts go to these rivers, test the rivers for pollutants, and see if there is a corresponding liability there in the financial statements. You would never want to start with a crude environmental cleanup costs. You already know those are there. Not to belabor the point, but it's a common area of mistake. Valuation is another key assertion, and this often will have to do with what you must follow as management if you want to comport with generally accepted accounting principles. So, let me give an example, in inventory, one of the key players in valuation is your cost flow assumption. LIFO versus FIFO, first-in first-out versus last-in first-out, or you could use average cost. Is it a historical cost carrying value, is that a fair value, carrying value? So you have to know, to do an audit correctly, to be audit you can be, you have to mind the gap. I'm sorry, that's another bad joke. But if you go to the UK and you get off of the subway system there, you see these signs all over the place, it says, mind the gap, and you hear their voice saying, mind the gap, and I can't help when I go there as a nerdy accounting professor thinking, if I want to be audit I can be, I need to mind the gap. What I'm saying there is that I have to know if it's inventory, what is its carrying value? Is a historical cost? No, it's not. It's lower cost of market, right? When you look at marketable equity securities, is a carrying value historical cost? No, it's not. Especially from a trading security, you have to carry out a fair value. So this valuation assertion, really makes the auditor have to wed mastery of generally accepted accounting principles or international reporting standards and audit standards. Rights and obligations. This is getting at, not so much does the asset or the liability exist, but is it your asset or your liability? So, what I'd like to tell my students here, is that you can go into a warehouse and you see all kinds of products in the warehouse. So you're not so worried about these products existing, because there they are. You can go and pick them up and look like make sure they're not fraudulent products for sure, and it'll be a wise thing to do. But a bigger question often will be, does my client really have the rights to these products? Or are they being held by my client, just at my client's warehouse, and maybe they are the products that belong to someone else? The next one is presentation and disclosure. There are a lot of rules and financial reporting standards about what you need to disclose with respect to account balances. Sometimes you have linked the footnotes and you need to follow those.
