Activity Based Risk Evaluation Model of Auditing

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Validity

Validity is a financial statement assertion and one of the three categories of misstatement. The assertion of validity may relate to:

• financial statement item. A financial statement item is valid when all account balances included in the financial statement item both (i) do exist and (ii) do pertain to the entity, as at balance date.

  For example, management may assert that accounts receivable are complete, valid and accurate. In relation to the assertion of validity, this means that all account balances included in the financial statement item (e.g. trade accounts receivable, wholesale accounts receivable, provision for doubtful debts, etc.) do exist and do pertain to the entity.

• account balances . A balance sheet account balance is valid when all assets, liabilities and equities included in the account balance both (i) do exist and (ii) are owned/owed (or controlled) by the entity, as at balance date.

  For example, management may assert that the account balance "retail inventory" is complete, valid and accurate. In relation to the assertion of validity, this means that management assert that all items of retail inventory that are included in the account balance do exist and are owned by the entity as at balance date.

  An income statement account balance is valid when all revenues and expenses included in the account balance both (i) do pertain to the entity, and (ii) have occurred during the relevant accounting period.

  For example, management may assert that the account balance "Wages expenditure" is complete, valid and accurate. In relation to the assertion of validity, this means that management assert that all wages expenditure included in the account balance does pertain to the entity and has occurred during the relevant accounting period.

• classes of transactions . A class of transaction is valid when all economic events included in the class both (i) do pertain to the entity, and (ii) have occurred, during the relevant accounting period.

  For example, management may (and usually does) assert that the class of transactions known as "payroll transactions" is complete, valid and accurate. In relation to the assertion of validity, this means that management assert that all economic events included in payroll transactions do pertain to the entity and have occurred during the relevant accounting period.

A misstatement of validity occurs where the assertion of validity is not true. For example, if an economic event included in payroll transactions did not occur (e.g. time recorded as time worked by an employee did not take place) the class of transaction (payroll) is not valid, and the class of transaction, as well as the related account balance (Wages expenditure) and financial statements, are misstated.

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