Financial Management Statement

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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?

AMRE’s 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.

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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 auditor’s judgment. The relevance, objectivity, timeliness, and the existence of the evidential matter lead to the auditor’s 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 didn’t 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.

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