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MrMuchimi
3 years ago
8

Professional auditing standards identify the principal "management assertions" that underlie a set of financial statements. The

occurrence assertion was particularly critical for ZZZZ Best's insurance restoration contracts. ZZZZ Best's auditors obtained third-party confirmations to support the contracts, reviewed available documentation, performed analytical procedures to evaluate the reasonableness of the revenues recorded on the contracts, and visited selected restoration sites. Comment on the limitations of the evidence that these procedures provide with regard to the management assertion of occurrence.
Business
1 answer:
faust18 [17]3 years ago
4 0

Answer:

Before we treat the question, lets examine the key words:

> Management assertions: this refers to claims made by members of management of a company with respect to certain aspects of a business. The concept is primarily used in regard to the audit of a company's financial statements, where the <em>auditors rely upon a variety of assertions</em> regarding the business. The auditors are required to test the validity of these assertions by conducting a number of audit tests.

> Occurrence Assertion: This belongs to one of the categories of claims usually made by management. Occurrence Assertion arises in two instances:

i. <em>Business transactions</em>, mostly in regard to the <em>income statement</em>. Here occurrence claims refer to the assertion that the business transactions recorded in the income statement actually took place.

ii. Occurrence assertion also arises when the authenticity of the information related to the presentation of information within the financial statements is being considered.

Section 31 of the Statements on Auditing Standards requires that these assertions be investigated, supported or verified using procedures and or other reasonable methods outside of the system providing these assertions.

The question indicates that at least three steps in this direction was taken:

  • ZZZZ Best's auditors obtained third-party confirmations;
  • they reviewed available documentation and performed analytical procedures to evaluate the legitimacy or the integrity of the revenues recorded on the contract
  • they visited selected restoration sites (most likely for direct observation)

     

The questions suggests that the evidence availed by these procedures are not without limitations. In order words, irrespective of the rigor involved with same, it is not fail proof.

Here are reasons why.

Explanation:

1. Absolute Proof may not be possible.

Fallacious and fraudulent assertions may be designed such that other evidencing documentation support the fraudulent position asserted

2. Third-Party confirmations are not fail proof. With sufficient motivation, they may be designed or influenced to support a fraudulent assertion. In a similar case-study, the restoration sites visited was fraudulently selected and stage-managed to give the appearance of an ongoing restoration work.

3. Some assertions are not material:  Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. If the assertion is of no significance then the judgement arrived at by the audit process will carry same weight.

4. Limitations of Time and Cost of verifying assertions:

This must be considered as accounts must be prepared within a certain time scale and the auditor may have to do with less than perfection and ideal evidence may be too expensive to obtain. In the example referred to above, It was later discovered that the restoration site was bogus. The informant had contacted the audit firm in April 1987 and asked for $25,000

in exchange for information proving that one of the firm’s clients was engaging in a massive fraud.

In summary, when presented with assertions, it is not sufficient to obtain third party confirmations. Third party confimations ought to be investigated.

Cheers!

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