Question

If understate expenses to inflate profit which account and assertion are at risk of misstatement?

Answer 1

If you understate expenses ,due to this your net income was overstated ,you inflate retained earnings and owners equity.

because you add netincome to retained earnings at the end of the period.

if the net income was overstated then you will pay more taxes than necessary.when exicutives delibaratly manage earnings to meet a desired goal,their actions may be considerd unethical or even fraudulent.

ASSERTIONS:

If your company sells inventory,you have many oppertunities to understate the cost of the goods sold.as per generally accepted accounting principles mark down inventory when its market price falls belw its cost.failure to take markdowns for distressed or missing inventory understate cost of goods sold and overstate the value of inventory,which will reduce the COGS.a company can postpone discretionary expenses,such as exicutive bonus or sharing profits contributions,untill a later period.if you capitalaize cost then also the expenses are understated.you can also understate depreciations expenses and fail to write off obsolete equipment.

DETECTION:

you can detect financial misstatements in several ways.look for revenues that are overstated because of one time events that are included in normal income,such as the sale of a real estate parcel.the wary of sudden increase in noncurrent assets and adrop in expenses.because it might indicate incorrect capitalaization of expenses.and the hidden expenses is a sudden rise in prepaid expenses,they are current assets.