Question

In: Accounting

What makes an account significant or an assertion relevant? Completeness why?

What makes an account significant or an assertion relevant? Completeness why?

Solutions

Expert Solution

An account is considered as a significant account when there is a possibility that the account could contain material misstatements, which could have a material effect on the financial statements. This account may be considered as containing misstatements either induvidully or when clubbed with other acccounts. An assertion is relevant when there is a possibility that the financial statement assertion may contain a material misstatement.

Audit assertions are claims or representations made by the management, who prepares the financial statements, and they relate to the appropriateness of the various claims made in the financial statements which are presented to the stakeholders of the company. To deteremine this, we consider both qualitative and quantitative factors.

The quantitative criteria are as follows:

  • volume of business, the larger the volume, the more are the chances of misrepresentation;
  • size of accounts and number of transactions taking place in the account, etc.
  • composition of account: the larger the cash component, the higher the risk of accountability

The qualitative factors include

  • contingent liabilities: these need to be included as a footnote in disclosures
  • loss due to errors or fraud: these would cause the statements to be misrepresented
  • loss due to markets or cycles: the business cylces can tend to swing upwards or downwards, similarly, the market sentiment would be another risk factor

Completeness is the assertion that all business transactions that needed to be recorded are correctly recorded within the time frame that they should have been recorded. All assets, liabilties and equity balances have been correctly reported. eg. if salary is payable, the entire breakup of the salary for all the emplyoees should be correctly recorded in the time that it became due.


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