Financial Management Statement - Free Essay Example

Sample details Pages: 4 Words: 1054 Downloads: 10 Date added: 2017/06/26 Category Management Essay Type Argumentative essay Did you like this example? Question: SAS No. 31, Evidential matter, identifies five management assertions that underlie a set of financial statements. Which of these assertions should have been of most concern to Price Waterhouse regarding the large period-ending adjustments AMRE recorded during the fourth quarter of fiscal 1989? AMREs fourth-quarter write-offs were large adjustments accepted by Price Waterhouse before issuing the unqualified opinion on the 1989 financial statements. These write-offs where fictitious assets that were written-off as losses or expenses in attempt to end the fraudulent activities that had been taking place. Don’t waste time! Our writers will create an original "Financial Management Statement" essay for you Create order SAS No. 31 on evidential matter obtained from an auditor provides a greater assurance of reliability than from an internal source. The auditor is an independent and unbiased collector of the evidential matter versus an internal source that may not be. There are five management assertions that underlie a set of financial statements. The auditors must have evidence to support the information in the financial statements that supports the existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. The evidential matter is obtained through inspection, observation, inquires and confirmations. The measure of the validity of such evidence for audit is the auditors judgment. The relevance, objectivity, timeliness, and the existence of the evidential matter lead to the auditors conclusions. This evidential matter is the underlying data for the auditor to make their decisions. The first assertion about existence or occurrence relates to the verification of the assets and liabilities exist at a given date. They verify that the transactions have for the assets and liabilities have been recorded during the correct period. An example is the inventories included in the balance sheet need to be verified by observing the physical inventory counts. The records need to be reviewed for the inventory, production, and purchasing. This existence assertion should have been of most concern to the Price Waterhouse auditors. Since there was a large period-ending adjustment being done by AMRE, the auditors should have first done an existence assertion to verify assets exist. The assets being written off should have been physically verified which should have shown that they were fictitious. Given that the assets being written-off were fictitious and the auditors didnt verify the existence of these assets, the fraud was not discovered during the audit. Assertions about completeness relate to the verification of all the transactions and accounts are correctly represented in the financial statements. An example is that the inventory quantities need to include all products, materials and supplies. The quantities owned by the company that are in transit or stored at outside locations need to be included. This assertion applies for the auditors in the AMRE case but should not have been of most concern. The auditors could have verified all of the transactions and accounts are in the financial statements but the issue in the AMRE case was that there were fictitious assets written-off. Verifying the transactions and accounts being in the financial statements may not have uncovered this fraud. Assertions about rights and obligations relate to the verification that the assets are owned by the company or that have the rights to the asset. Similarly, it verifies that the liabilities are obligations of the company. Auditors need to examine the vendor invoices, consignment agreements, and contracts. This assertion should not the highest concern for the auditors but it does apply. The year-end write-offs should have been verified that the AMRE had rights to the asset by verifying the invoices. This may have uncovered that the assets were fictitious. Assertions about valuation or allocation relate to the verification that the assets, liability, equity, revenue, and expenses have been included in the financial statement with the correct amounts. An example is that the inventories must be stated at the lower of cost or market. Auditors also need to review the direct labor and standard overhead rates. They need to review the inventory turnover and look at industry trends. This assertion should not have been of the most concern to the auditors in this case but is an important one. If the auditors would have done a valuation assertions to verify that the assets were included in the financial statements were the correct amount, they should have under covered that they were incorrectly stated or fictitious. I believe that the existence assertion is of most concern but this assertion would be the next most important concern related to the yearend adjustments. Assertions about presentation and disclosure relate to the verification that the components of the financial statements are properly classified, described, and disclosed. Auditors need to compare the disclosures in the financial statements to the requirements of GAAP. This assertion was not an issue in the AMRE case. There was no mention of issues found with the financial statements being properly classified, described or disclosed. In the AMRE case, Price Waterhouse auditors didnt apply any of these auditing procedures to review the large losses from the elimination of the Decks divisions. Instead, they accepted the clients explanations for these write-offs. The staff auditor inquired why the large number of unset leads was being dropped. The response from the AMRE accountant was that the unset leads had been improperly recorded. Given this, the staff auditor didnt inquire any further and concluded that it was an isolated incident. A key factor that influenced the auditors was their former colleague being the CFO. The auditors should have followed the auditing procedures in understanding these large write-offs and should not have been changed their auditing methods because they knew the CFO. In conclusion, the existence or occurrence assertion should have been of most concern to the AMRE auditors Price Waterhouse regarding the large period-ending adjustments recorded during the fourth quarter of the fiscal year 1989. The evaluation or allocation assertion would be the next highest concern because it relates to the verification that the assets and expenses have been included in the financial statement with the correct amounts. But the existence assertion relates to the verification of the assets and liabilities exist at a given date. If the auditors would have followed this, they should have found that fictitious assets that were written-off did not exist. References Contemporary Auditing Real Issues Cases by Michael Knapp Auditing Management Assertions: The Impact of SAS No. 106 by Deborah Archambeault at https://www.tncpa.org/Journal/articles/Auditing_Management_Assertions.pdf