Assurance on XBRL Instance Document: A Conceptual Framework of Assertions

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Assurance on XBRL Instance DocumentA Conceptual
Framework of Assertions
Rajendra P. Srivastava And Alexander Kogan
16th World Continuous Auditing Reporting
Symposium Rutgers University- Newark November 7
and 8, 2008
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Outline

• Definition of Assurance on XBRL Instance Document
• Background
• SEC Proposal Interactive Data to Improve
  Reporting
• Current Approaches to Assurance on XBRL Instance
  Documents
• Assertions and Assertion Based Audit Approach
• Materiality concepts
• Control Test versus Substantive Procedures
• Conclusions

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Assurance on XBRL Instance Document

• General Definition (Srivastava Kogan, 2008)
• The XBRL instance document is a true
  representation of the electronic document (ASCII
  or HTML) filed with the SEC
• Definition under SEC Proposal
• The tagged financial statements are accurate and
  consistent with the information the company
  presents in its traditional format filings

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Background

• SEC Proposal Interactive Data to Improve
  Reporting (2008)
• Plumlee, D. and M. Plumlee. 2008. Assurance on
  XBRL for Financial Reporting. Accounting
  Horizons, Vol. 22, No. 3 353368
• AICPA Assurance Services Executive Committee.
  2008. The Shifting Paradigm in Business Reporting
  and Assurance.
• 1. XBRL Assurance Task Force, 2. Data Integrity
  Task Force
• Boritz, J. E. and W. G. No. 2007. Auditing an
  XBRL Instance Document The Case of United
  Technologies Corporation. Working paper,
  University of Waterloo.
• Assurance Working Group (AWG) of XBRL
  International (2006)
• Public Company Accounting Oversight Board
  (PCAOB). 2005. Staff QA Regarding XBRL Financial
  Reporting.

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XBRL Instance Document Preparation Process
XBRL Specification 2.1 An XML Schema that
provides the rules for valid XBRL instance
documents and taxonomies

• US GAAP Taxonomies
• Standard elements
• Standard labels
• Standard calculations
• Standard references
• Standard presentations

• Corporate Extension Taxonomies
• Unique elements
• Unique labels
• Unique calculations
• Unique references
• Unique presentation

tagging
Corporate Financial Facts
Instance Document
Taken from Plumlee Plumlee 2008
SEC Provided Viewer
Presentation Tools/Style Sheets
Final Output
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SEC Proposal Interactive Data to Improve
Reporting (May 2008)

• Proposal to mandate the filing of corporate
  financial data in interactive data (XBRL) format
  as exhibits along with human readable traditional
  filings and posting of the XBRL instance document
  on the companys website.
• Companies with a worldwide public float over 5
  billion will be required to submit their primary
  FS, footnotes and FS schedules in XBRL format for
  fiscal periods ending in late 2008.
• Accelerated filers will be required to comply
  with the new rules starting the following year
• The remaining public companies would comply the
  year after that.

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General Requirements under SEC Proposal (Rule 405
Regulation S-T)

• Information in interactive data format should not
  be more or less than the information in the ASCII
  or HTML part of the report
• Use of the most recent and appropriate list of
  tags released by XBRL U.S. or the IASCF as
  required by EDGAR Filer Manual.
• Viewable interactive data as displayed through
  software available on the Commissions Web site,
  and to the extent identical in all material
  respect to the corresponding portion of the
  traditional format filing
• Data in the interactive data file submitted to
  SEC would be protected from liability for failure
  to comply with the proposed tagging and related
  requirements if the interactive data file either
• Met the requirements or
• Failed to meet those requirements, but failure
  occurred despite the issuers good faith and
  reasonable effort, and the issuer corrected the
  failure as soon as reasonably practical after
  becoming aware of it.

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Legal Liability under SEC Proposal

• The financial statements and other disclosures in
  the traditional format part of the related
  official filing with which the interactive data
  appear as an exhibit would continue to be subject
  to the usual liability provisions of the federal
  securities laws.
• The usual liability provisions of the federal
  securities laws also would apply to
  human-readable interactive data that is identical
  in all material respects to the corresponding
  data in the traditional format filing as
  displayed by a viewer that the Commission
  provides.

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Validation Software SEC Proposal Expectation

• Check if required conventions (such as the use of
  angle brackets to separate data) are applied
  properly for standard and, in particular,
  non-standard special labels and tags
• Identify, count, and provide the staff with easy
  access to non-standard special labels and tags
• Identify the use of practices, including some the
  XBRL U.S. Preparers Guide contains, that enhance
  usability
• Facilitate comparison of interactive data with
  disclosure in the corresponding traditional
  format filing
• Check for mathematical errors and analyze the
  way that companies explain how particular
  financial facts relate to one another

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SEC Perspective on Assurance of XBRL Instance
Document

• No requirement to involve third parties for
  preparing or providing assurance (Based on the
  following consideration)
• Comprehensive list of tags
• User-friendly software to create instance
  document
• Multi-year phase-in for each filer
• Interactive data technology specifications
• Advances in rendering/presentation software and
  validation tools
• Expectation that filers will take the initiative
  to develop sufficient internal review procedures
  to promote accurate and consistent tagging and
• The filers and preparers liability for the
  accuracy of the traditional format version

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Current Approaches to Conducting Assurance Service

• PWC Actual audit of United Technologies
  Corporation Financial statements
• Boritz and No (2007) A mock audit performed to
  explore the process
• AICPA Assurance Services Executive Committee.
  2008. The Shifting Paradigm in Business Reporting
  and Assurance
• Public Company Accounting Oversight Board
  (PCAOB). 2005. Staff QA Regarding XBRL Financial
  Reporting.
• Assurance Working Group (AWG) of XBRL
  International (2006)

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Concerns about the Current Approaches

• In general, there is a lack of conceptual
  framework
• It is similar to what the audit process used to
  be some 50 years back a bunch of procedures to
  be performed specific to each balance sheet
  account

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Accounting Model FASB, 1993
 
User
Understandability
Usefulness
Relevance
Reliability
Timeliness
Verifiable
Faithfully Represented
Feedback
Consistency Comparability
Prediction
Neutral
Benefit gt Cost Materiality
Statement of Financial Accounting Concepts No.
2, Qualitative Characteristics of Accounting
Information, Original Pronouncements, Accounting
Standards as of June 1, 1993, Volume II (AICPA
Pronouncements, FASB Interpretations, FASB
Concepts Statements, FASB Technical Bulletins),
Financial Accounting Standards Board, CN, USA,
1993
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Management Assertions (SAS 106) and Related
Audit Objectives

• Assertions about account balances
• Existence
• Completeness
• Rights and Obligations
• Valuation or Allocation
• Assertions about classes of transactions and
  events
• Occurrence
• Completeness
• Accuracy
• Cutoff
• Classification
• Assertions about presentation and disclosure
• Occurrence and rights and obligations.
• Completeness
• Classification and understandability

• Audit Objectives
• Validity
• Completeness
• Ownership
• Valuation
• Cut-off
• Classification
• Disclosure

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IQ Model (Bovee, Srivastava Mak, IJIS 2003)
Information Quality
Relevance
Integrity
Interpretability
Accessibility
Criterion 1
Timeliness
Criterion n
Consistency
Accuracy
Non-Fictitiousness
Completeness
Age
Volatility
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Risk Based Approach for Conceptualizing Assertions

• Data Deficiencies in the XBRL Instance Document
• Omissions of relevant data from the traditional
  format documents (Completeness)
• Insertions of data not present in the traditional
  format documents (Existence)
• Erroneous element values and / or attribute
  values (such as context, unit, etc.) (Accuracy
  Element Accuracy or Attribute Accuracy)

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Risk Based Approach for Conceptualizing Assertions

• Deficiencies of the Mark-up in the XBRL instance
  Document
• Erroneous tagging of data that violates XML
  syntax rules (Violation of Well-formedness)
• Erroneous tagging of data that violates XML
  Schema (Violation of Validity)
• Inappropriate choice of XBRL elements to tag
  traditional format document data (Violation of
  Proper Representation)

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Risk Based Approach for Conceptualizing Assertions

• Deficiencies of XBRL Taxonomies used by the Filer
• Improper choice of general and industry-specific
  XBRL taxonomies by the filer (Proper Taxonomies)
• Violations of XML or XBRL language rules in XBRL
  taxonomy extensions by the filer (Valid Taxonomy
  Extensions)
• Inappropriate introduction of new elements in
  XBRL taxonomy extensions (Proper Extension
  Elements)
• Inappropriate / erroneous linkbases in XBRL
  taxonomy extensions (including the choice of
  inappropriate/misleading labels) (Proper
  Linkbases)

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A Quality Model for XBRL Instance Document
(Srivastava Kogan 2008)
XBRL instance document is a true representation
of the electronic document (ASCII or HTML) filed
with the SEC
It faithfully represents the Electronic Filings
of FS
2. Meta-Data in XBRL Instance Document are
Reliable
1. Business Facts in XBRL Instance Document are
Reliable
3. Meta-Data External to XBRL Instance Document
are Reliable
1.2 Existence
1.1 Completeness
1.3 Accuracy
1.3.2 Attribute Accuracy
1.3.1 Element Accuracy
2.2 Validity
2.1 Well-Formedness
2.3 Proper Representation
3.3 Proper Taxonomy Extension Elements
3.4 Proper Linkbases
3.2 Valid Taxonomy Extensions
3.1 Proper Taxonomies
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Assertion Based Audit Methodology1. Business
Facts in XBRL Instance Document are Reliable
Procedures as items of evidence pertaining to the
assertion
Specific Assertions
Manual (M) Trace from the text document to the
instance document and note that all business
facts are tagged. Intelligent Software (IS)
Intelligent software can be programmed to tag all
the business facts. Compare programmatically each
tagged fact prepared for the SEC filing with the
tagged facts by the intelligent system.
Completeness
M IS Intelligent software creates a text
document from the XBRL tagged document and a
knowledgeable person traces from this created
document to the original document to check if the
tagged facts are present in the original
document.
Existence
M Trace from the text document to the instance
document to check if the values of all the
business facts are the same as the values on the
rendered document. IS Intelligent software can
be programmed to read the values of the business
facts from the original document and compare them
with the corresponding values in the instance
document.
Element Accuracy
Accuracy
M Trace from the text document to the instance
document to check if the values of all the
attributes are the same as the values of these
attributes in the instance document. IS
Intelligent software can be programmed to read
the values of the business items from the
original document and compare them with the
corresponding values in the instance document.
Attribute Accuracy
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Assertion Based Audit Methodology2. Meta-Data
in XBRL Instance Document are Reliable
Procedures as items of evidence pertaining to the
assertion
Specific Assertions
Manual (M) Evaluate the error messages generated
by the software to verify well-formedness.
Intelligent Software (IS) Utilize any approved
XML parsing software to verify that the instance
document is well-formed.
Well-Formedness
M Evaluate the error messages generated by the
software to verify validity. IS Utilize any
approved XML validating parsing software to
verify that the instance document is valid.
Validity
M Trace from the instance document to the text
document to check if the tags, as they are
defined in the XBRL taxonomies, properly
represent the facts of the traditional format
document. IS Intelligent software can be
programmed to maintain a mapping between the
facts of the traditional format document and the
elements of the instance document to aid in
manual decision making.
Proper Representation
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Assertion Based Audit Methodology3. Meta-Data
External to XBRL Instance Document
Procedures as items of evidence pertaining to the
assertion
Specific Assertions
Manual (M) Compare the discoverable taxonomy set
in the instance document with the available
approved and acknowledged XBRL taxonomies to
check if all the appropriate taxonomies are used
and all the used taxonomies are
appropriate. Intelligent Software (IS) Utilize
XBRL processing software to identify and
visualize the discoverable taxonomy set in the
instance document.
Proper Taxonomies
M Evaluate the error messages generated by the
software to verify validity. IS Utilize approved
XBRL processing software to verify that the
taxonomy extensions are valid.
Valid Taxonomy Extensions
M Analyze new elements in XBRL taxonomy
extensions to verify that they are defined
properly and they not duplicate unnecessarily
existing elements. IS Utilize XBRL processing
software to examine new elements in XBRL taxonomy
extensions.
Proper Extension Elements
M Analyze new and changed arcs in the linkbases
of XBRL taxonomy extensions to verify that they
are defined properly. IS Utilize XBRL processing
software to examine new and changed arcs in the
linkbases of XBRL taxonomy extensions.
Proper Linkbases
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Audit Approach Control Test versus Substantive
Test

• Control tests on the effectiveness of the
  software that produces XBRL instance document
• Control tests on the effectiveness of the
  validation software
• Substantive procedures
• All major line items need to be traced and
  compared
• No Statistical Sampling
• Each line item is a separate test unit not
  appropriate for statistical sampling
• However, on certain attribute one would be
  tempted to perform sampling but the size of the
  population is too small to use sampling

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Other IssuesMateriality and Risk

• Two kinds of materiality
• Materiality for the entire FS
• Materiality for each line item in the instance
  document
• Since the materiality concept used in the FS
  audit is at the aggregate level, the implied
  materiality in the instance document is also at
  the aggregate level.
• However, since users are going to use each line
  item separately in their decisions, they will
  perceive each line item to be accurate in
  isolation. This would lead to erroneous decisions

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Conclusion

• For effective and efficient assurance process of
  XBRL instance documents, we need assurance
  objectives (assertions) as a set of criteria
  against which evidence could be gathered and
  evaluated to make a decision whether the
  assurance objectives have been met or not in
  order to give an opinion