The finance and investment cycle involves a diverse set of accounts, each with specific assertions that auditors must evaluate to ensure financial statement accuracy. The cycle’s complexity and variability across companies make it challenging to define a "typical" structure, as firms may be primarily equity-financed, debt-financed, or have varying investment activities. The type of investment significantly influences the audit effort and the relevance of assertions.
Exhibit 10.4: Significant Accounts and Assertions
The document provides a table (Exhibit 10.4) listing the significant accounts and their relevant assertions, summarized below:
Relevant Assertions:
Existence/Occurrence: Ensures recorded investments exist and transactions occurred.
Completeness: Verifies all investment transactions are recorded.
Valuation: Confirms investments are recorded at appropriate values (e.g., fair market value or equity method adjustments).
Presentation and Disclosure: Ensures investments are properly classified (e.g., trading, available-for-sale) and disclosed in accordance with GAAP.
Context: Investments vary widely, from simple government debentures (e.g., Microsoft’s $116 billion in 2021, relatively easy to audit due to public valuations) to complex equity method investments and intangibles ($66 billion for Microsoft, requiring more audit effort due to valuation challenges).
Relevant Assertions:
Existence/Occurrence: Confirms recorded debt exists and transactions occurred.
Completeness: Ensures all debt obligations are recorded, including capital leases.
Valuation: Verifies debt is accurately valued, including amortization calculations.
Presentation and Disclosure: Checks proper classification (e.g., current vs. long-term) and disclosure of terms, covenants, and future payments.
Context: Long-term debt includes notes, bonds, and mortgages, critical due to their size and impact on financial position.
Relevant Assertions:
Completeness: Ensures all issued stock and treasury stock repurchases are recorded.
Presentation and Disclosure: Verifies correct allocation (e.g., stock option exercises) and adequate disclosure of stock transactions.
Context: Capital stock accounts track equity issuances, with focus on ensuring all transactions are captured and properly presented.
Relevant Assertions:
Completeness: Confirms all dividends and prior-period adjustments are recorded.
Context: Retained earnings reflect accumulated earnings, requiring verification of dividend declarations and error corrections.
Mergers and acquisitions, such as Verizon’s $4.8 billion Yahoo purchase or $130.1 billion Verizon Wireless acquisition, highlight the cycle’s significance. These transactions involve tangible and intangible assets (e.g., identifiable intangibles vs. goodwill), with valuation and classification impacting audit assertions. Goodwill, subject to impairment tests rather than amortization, increases valuation risks, emphasizing the importance of the valuation and presentation/disclosure assertions for investments.
The finance and investment cycle includes significant accounts: Investments, Long-Term Debt, Capital Stock, and Retained Earnings. Each has relevant assertions critical for auditing:
Investments: Existence/Occurrence, Completeness, Valuation, Presentation and Disclosure—driven by diverse investment types and valuation complexities.
Long-Term Debt: Existence/Occurrence, Completeness, Valuation, Presentation and Disclosure—focused on capturing all obligations and proper terms disclosure.
Capital Stock: Completeness, Presentation and Disclosure—ensuring all equity transactions are recorded and disclosed accurately.
Retained Earnings: Completeness—verifying dividends and adjustments are fully captured.
The variability in financing (equity vs. debt) and investment activities (simple securities vs. complex intangibles) shapes the audit approach, with assertions like valuation and presentation/disclosure often requiring significant attention due to estimation and disclosure risks.