Discuss the Assertion Methodology

In preparing financial statements which show true and fair view of the company’s financial position and performance, the management explicitly or implicitly makes certain assertions.
These assertions are categorized as:
1. Existence
This is the assertion that an asset or liability exists at a given date. It is either true or not true that
an asset or liability reflected in the balance sheet was in existence at the balance sheet date.
2. Rights and obligation
This is the assertion that an asset or liability in financial statements pertains to the entity at a
given date i.e. an asset is a right of the entity and a liability a genuine obligation of the entity.
3. Occurrence
This is the assertion that a transaction or event took place which pertains to the entity during the
financial period or that a recorded event or transaction actually took place as recorded and it is a
valid transaction pertaining the entity. It is either the transaction took place as recorded or not.
4. Completeness
This is the assertion that there are no unrecorded assets, liabilities, transactions or undisclosed
items. It would suggest 100% completion and accuracy however, this is impossible under accrual
basis of accounting. The users of the financial statements do not expect 100% completeness in
financial statements but completeness within a certain range such that they can still make justifiable
decisions. This assertion is therefore assessed for reasonableness as some transactions may be
excluded if they are not material.
5. Valuation
This is the assertion that an asset or liability is recorded at an appropriate carrying value. It is the
most crucial assertion of all the assertions. In arriving at appropriate carrying value of an asset
or liability, the management considers.
1 Overall valuation basis. The management must consider the entity as a whole and make
an assessment whether it is appropriate to apply the going concern assumption in preparing
the financial statements. The basis of preparing financial statement when entity is going
concern is radically different from preparing financial statement on basis that the entity is not
a going concern.
2 Suitable accounting policies. In determining carrying amount of an asset or liability
appropriate accounting policies must be followed. The accounting policies must be in line
with the generally accepted accounting principles (GAAPs), appropriate to the circumstances
of the entity, applied consistently, be in conformity with entity’s industry practices and be
adequately disclosed.
3 Desirable qualitative characteristics. The suitable accounting policy adopted must be applied
after taking into consideration the qualitative characteristics of materiality, prudence and
substance over form. Since it may subjective whether an entity is a going concern or not, the
accounting policy adopted can be subsequently subjective thus the assertion of valuation
can only be assessed for reasonableness.
6. Measurement
This is the assertion that a transaction or an event is recorded and proper amounts of revenue and
expense are allocated to the proper period for proper reporting purposes. Whether a transaction
brings into being an asset or liability, revenue or expense depends largely on the capitalization
policy of an entity i.e. the guidance as to what items are revenue items and capital items.
The period in which a transaction took place may be influenced by management’s desire to reflect
a given financial position. However, where revenue or expense of an item is spread over more
than one accounting period is called allocation rather than measurement and is a component of
valuation.
7. Presentation and disclosure
This is the assertion that an item is disclosed, classified and described in accordance with the
applicable financial reporting framework. The information in financial statements should be
presented without bias, be relevant to the needs of the users and meet qualitative characteristics
of understandability, relevance, reliability and comparability. This assertion is not assessed for
truth but rather adequacy or reasonableness.
In conclusion, truth and fairness of financial statements can be assessed on these seven
assertions i.e. the financial statements will reflect a true and fair view of company’s financial
position and performance if the seven assertions are used as guidelines in preparing the financial
statements .
8. Classification
Are transactions recorded in appropriate accounts?
9. Cut-off
Are transactions recorded in appropriate period?
10. Accuracy
Are the amounts disclosed in the financial statements appropriate?
11. Allocation
Are account balances included in appropriate accounts?

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Wilfykil answered the question on April 11, 2019 at 08:32