Lessons · Accounting · what management is claiming when it publishes accounts
What management is claiming, line by line
Publishing a balance sheet is making a set of claims. That the assets exist. That nothing is missing. That the amounts are right. That the company owns them and owes the liabilities. That everything is presented and described properly.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It turns a vague instruction into a checkable list. Told to audit inventory, a beginner counts things. Asked which claim they are testing, they see that counting tests existence and proves nothing about ownership, valuation or completeness, and that each of those needs a different procedure.
How to think about it
For any balance, write the claims separately and ask what would show each one false. That question produces the procedure; the procedure does not come first.
Worked example
Existence: the inventory is really thereAttend the count and look at it.
Completeness: nothing has been left outStart from goods received records and work into the ledger.
Valuation: it is worth what it saysCost, and whether it would sell for less.
Rights: the company owns itGoods held on somebody else's behalf are on the same shelf.
Your turn
Name the assertion that says nothing has been left out.
The assertion that nothing has been omitted is
Solve one, graded on the server
The trap
Testing existence and believing you have audited the balance. Existence is the easiest assertion to test and usually the least likely to be wrong, and a stock count says nothing at all about whether the goods are worth what the books claim.