Speaker 1: What's up Audit fans? We know the financial statements are supposed to be true and fair, or more accurately, free from material misstatement. But how exactly do I determine whether something is telling the truth? I can't really look at the income statement or the balance sheet and put it under a lie detector test and say, are you lying? So instead today we're going to look at assertions and how we use them to determine whether the financial statements are true and fair or free from material misstatement. Let's get into it. Assertions is a really unusual word. It's not something that comes up in everyday conversation when you're hanging out with your friends or catching up with your family. So what exactly is an assertion? Well, an assertion is a statement that you think is true. I could make an assertion about anything. My kids are the cutest kids on the face of the planet. But how do we measure that cuteness? Similarly with financial statements, how do I measure what is free from material misstatement? Now, materiality comes into that, but then how do we measure what is misstated? How do I know what is true and what is fair in a number? Well, today we're going to look at assertions and see how they fit into that whole process. Our assertions are going to work as characteristics that we need to test to make sure that the financial numbers and disclosures are correct and appropriate. So if you meet all of the assertions for your relevant transaction or balance, then we know that the financial statements are going to be appropriately recorded. ISA 315 has all of this information. It gives you all of the assertions and then some definitions using our audit language. But what exactly does that mean in plain English? Now, we've got two types of assertions. We've got assertions around transactions and think about transactions as anything for us that's really going to be on the profit and loss. So if it's on the income statement, if we're thinking about our revenues, our expenses, our dividend payments, anything that's on the income statement is going to be a transaction. So these are the things where we're going to apply the transaction balances. So realistically, what that means is that we say that all of our transactions have to meet all of these assertions to be appropriately recorded. So what does occurrence mean? Occurrence means, did the transaction actually occur? Did it really happen? Did we have goods go out to the customer? Did we have a service provided to the customer? So we're saying, is it real? Did it really happen? Did it actually occur? Now, all of these assertions have a hint in the name. The second one is completeness. So completeness really means, have we recorded all of our transactions? I haven't left off some or excluded others. The next one we have is accuracy. And accuracy comes all down to the dollars. Have we recorded every transaction accurately? That is, have we used the correct price? Have I used the correct quantity? Have those two been multiplied together to get the right total? And then every item on my invoice, for example, for a sale, do they all add up to the right amount? So has my transaction been accurately recorded? Is the number that's in there an accurate reflection of the economic transaction that actually happened? After that, we have cutoff. And remember, cutoff is all about the correct financial period. So think about it this way. We want our transactions recorded for the financial year because our income statement is for a period over a certain amount of time. So that's six months or 12 months is the financial period. So I want to make sure at the end of the 12 months for Australia on the 30th of June at 11.59 and 59 seconds, we cut off any sales transactions. Now, if you're in a bricks and mortar store, that's not such a big issue. But if you're an online business, recording cutoff, knowing that exact point and transactions on one side or in this financial year, transactions after the cutoff point are in the next financial period. That's really important. And that's what cutoff is all about. So it's about cutting off our transactions at the end of the period. Now, classification comes down to our journal entries. And those journal entries are about making sure that we have the right debit and that we have the right credit. Am I debiting the correct expense account? Am I crediting the correct revenue or revenue sub account in my journal entries? And then the last one is presentation. And really, this is all about how things look in the financial statements. And I'll write FinStats here. FinStats means financial statements. So how does it look in the financial statements? Is everything prepared in accordance with IFRS if I'm international or my Australian accounting standards, my AASBs, if I'm here in Australia? So we need to make sure that the number is correct, but all the disclosures that go around that number, any additional information about revenue breakdowns, disclosures about qualitative information that the AASB or IFRS requires. Are in there about those particular transactions. So for our transactions, did it really happen? Did it occur? Have we recorded all of our transactions at the correct dollar amount in the correct financial period using the right journal entries and displayed appropriately in the management's version of the financial statements? So now that's transactions. We're going to flip on over into balance sheets. So just like the name, balance assertions apply to the balance sheet. If we remember our introductory accounting, our balance sheet is our assets, it's our liabilities, and it's our owner's equity. That's not the actual accounting formula, of course. Remember, it's assets minus liabilities equals owner's equity. Little test of intro accounting there for you. But our balance assertions really are those things that apply to assets, liabilities, and owner's equity. So let's go through them one by one. The first one is existence. Again, this is, is it real? Does the asset really exist? Does the liability really exist? Does the owner's equity really exist? The second one is rights and obligations, and this one needs to be split up because rights applies to our assets and our owner's equity. So that's rights, and our obligations applies to our liabilities. So do I own or control an asset to have the right to record it? Do I owe a liability? Do I have an obligation for that liability? Next up, we have completeness, which again, is the idea that we've recorded everything. We've included all of our assets, all of our liabilities, all of our owner's equity items. So again, that is the whole set of financial records complete. Are we missing anything? So the key question there, is anything missing or, I guess, intentionally omitted? Next, we have accuracy, valuation, and allocation, and accuracy is the same as the previous one. That's about the dollars. Has everything been correctly used, calculated from our source documentation? Then we have valuation and allocation, and this is a little bit different than my previous video. There's been a standards change since then. This standard now includes accuracy, valuation, and allocation, but they essentially have everything to do with the calculation of the number that we see on the balance sheet. So when we say valuation, sometimes we might need to be using estimates. Have we calculated everything using the right methodology, using the right assumptions, and then following the right directions in the calculation procedure? And then allocation, so where things might need to be allocated between, for example, an asset and the contra asset of accumulated depreciation. Has that been allocated correctly? The next one we have is classification, and classification is sort of a little bit about the journal entries, but really, are they sitting in the right category on the balance sheet? So is it an asset? If it is an asset, is it a current asset or a non-current asset? And if it's a liability, is it a current liability or a non-current liability? Classification is about making sure we've got it in the correct subcategory and category within the financial statements. And then the last one is presentation and disclosure, which again is that IFRS, AASB, have our disclosures for our presentation of our items met the requirements of the individual standards. So now let's look at how we can sort of consolidate all of those different assertions. So I've got both of the sets of assertions here, and I'm going to draw lines between them to show you that some of these are very similar. So occurrence and existence, pretty much the same thing, but we use the word occurrence for transactions because I could sort of say did a transaction exist, but grammatically, it makes sense to say did that transaction occur? I can't really say to an asset, did this asset occur? So we use the word existence. Then we have completeness. Completeness here and completeness there, it's the same thing. It's has everything been included? Have we recorded all of something? Now, you might notice here we have accuracy as the third one, and then we have accuracy down here. So again, that's everything related to the dollar values of items. We have rights and obligations, which is sort of separate, and it's a little bit separate, and I guess cut off, they sort of end up as separate, standalone assertions that don't really have an equivalence with each other. You'll notice that classification is the same for both of them. Again, that's making sure that things are in the right spot on the financial statements, on the income statement or on the balance sheet. My debit and my credit, my journal entries have resulted in the right categorization of items. And then the final one is presentation and disclosure, which is the same again, which is making sure that everything is presented and disclosed appropriately in accordance with our applicable financial reporting framework. So that's assertions in a nutshell. Thanks for watching. As always, if you're after more videos, please make sure that you subscribe. If the video was useful, I'd appreciate a thumbs up, and you can check out lots of other related videos on my YouTube channel. And don't forget also to check out my free audit video study guide on amandalovestoaudit.com. I'll see you next time. Bye.