Financial Claims Confirmed on Financial Documents
Hey there! Financial statement assertions are claims that a company makes about the accuracy of the information in their financial statements, including the balance sheet, income statement, and cash flow statement. These assertions are also known as management assertions and can be either implicit or explicit.
Here are five types of financial statement assertions:
- Accuracy and Valuation: ensures that all figures presented in a financial statement are accurate and based on the proper valuation of assets, liabilities, and equity. This assertion also makes sure that different components of a financial statement, such as assets, liabilities, revenues, and expenses, are properly classified. For example, inventory should be valued per the International Accounting Standards Board (IASB) IAS 2 guidelines, which require inventory to be valued at the lower of either cost or net realizable value.
- Existence: claims that the assets, liabilities, and shareholder equity balances listed on a company's financial statements truly exist and are free from fraudulent activity at the end of the accounting period the financial statement covers. To test the authenticity of this assertion, you can physically verify all noncurrent assets and receivables.
- Completeness: attests that the financial statements are thorough and include every item that should be included for the given accounting period. To test for completeness, you can review accounts and reconcile payables to supplier statements. This assertion means that all transactions in the statement occurred during the accounting period that the statement covers and that all transactions that occurred during the stated accounting period are in the statement.
- Rights and Obligations: ensures that all assets and liabilities included in the financial statement belong to the company issuing the statement. This assertion confirms the company has legal authority and control over all the rights to assets and obligations to liabilities highlighted in the financial statements. To test the authenticity of this assertion, you can review legal documents such as deeds and borrowing agreements for loans and other debts.
- Presentation and Disclosure: asserts that all appropriate information and disclosures are included in the company's financial statements, and the information presented is fair and easy to understand. Reviewers can use certain checklists to ensure the financial statements comply with accounting standards and regulations.
Investors and analysts rely on accurate statements to evaluate a company's stock, as inaccurate figures can lead to misleading financial metrics, such as the price-to-book ratio (P/B) or earnings per share (EPS). The Financial Accounting Standards Board (FASB) establishes accounting standards in the United States, with publicly traded companies required to follow Generally Accepted Accounting Principles (GAAP) when preparing financial statements.
During an audit, the auditor reviews the reliability of the financial statement assertions. It's essential for entities to adhere to these assertions to present accurate and reliable financial statements, as it’s a vital tool for informed decision-making by investors, analysts, and management teams.
- In the world of Initial Coin Offerings (ICOs), regulation plays a crucial role in ensuring the accuracy and valuation of tokens, as they are financial instruments that represent assets or rights.
- For personal-finance management, understanding the completeness and presentation of a business's financial statements is essential when investing in stocks, as it provides a clear picture of the company's financial health.
- The ICO market is heavily regulated by financial bodies like the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC), emphasizing the importance of compliance with accounting principles and regulations in the realm of business and finance.
