Audit Assertions

What are Audit Assertions?

Audit assertions make up an important element in the different stages of financial statement audits. An auditor uses audit assertions and procedures to perform tests on a company’s policies, guidelines, internal controls, and financial reporting processes. In financial statements, assertions about the recognition, measurement, presentation, and disclosure of financial information are included.

Audit assertions involve claims, which are implicitly or explicitly stated by a firm’s management, in relation to the precision of the elements of the financial statements and the disclosures included therein. In other words, these are things that management asserts are true about the financial statements that requires auditors to test the validity of them.

What Does Audit Assertions Mean?

Audit assertions fall under several classifications, including transactions, account balances, and disclosures. All assertions should be accurate, recorder within the proper accounts, and at their proper valuation. Furthermore, the assertions should verify that the entity owns its rights to the firm’s assets, and is obligated under the firm’s liabilities. All information included in the financial statements should be properly and comprehensibly presented.

The audit assertions are primarily regarding the correctness of the different elements of the financial statements and the disclosures of a company. Audit Assertions are also referred to as Financial Statement Assertions and Management Assertions.

Example

Mark is an accountant, and he is preparing the financial statements of a leading shipping company. The company’s manager has provided Mark with a series of audit assertions, which Mark should take into account to guarantee the good standing of the financial statements.

In particular, the manager of the shipping company has explicitly claimed that the transaction audit assertions regarding the assets, liabilities, income and equity of the firm should be disclosed in accordance with the International Financial Reporting Standards (IFRS Standards).

To crosscheck with the manager, Mark selects a sample of entries from the balance sheet, including inventory, long-term debt, and equity, and he traces all appropriate amounts recorded in the balance sheet. He calculates all the figures from the beginning, and he performs a control account to ensure that all the entities are rightfully included on the balance sheet, accurately valued, and in agreement with the measurement values.

He follows the same procedure to check the descriptions of the accounts recorded in the balance sheet as well as the disclosure for each transaction. Mark calculates the transactions to ensures their accuracy, and he read their description to ensure it is clear and comprehensible.

The procedure that Mark follows is a typical audit assertion procedure that relates to a firm’s transactions.

Different Categories of Assertions

Audit assertions can be broadly listed into three general categories of assertions which are listed below:

  • Account Balances – These assertions are generally pertaining to the end of period balance sheet accounts such as assets, liabilities and equity balances.
  • Classes of Transactions – These assertions are usually used for income statement accounts.
  • Presentation and Disclosure – These assertions deal with presentation and disclosure of different accounts in the financial statements.

List of Audit Assertions Related to Account Balances

#1 – Existence

This refers to the fact that the assets, the liabilities and the equity balances mentioned in the books actually exist at the end of the accounting period. This assertion is critical for the asset accounts because it is a reflection of the strength of the company.

#2 – Completeness

This refers to the fact that the assets, the liabilities and the equity balances, which were supposed to be recognized, have been recorded in the financial statements. It is to be noted that leaving out any of the aspects of an account can lead to the wrong representation of the financial health of the company.

#3 – Rights & Obligations

This pertains to the confirmation of the fact that the entity has the right to ownership of the assets and the obligations for the liabilities recorded in the financial statements of the entity.

#4 – Valuation

This type of assertion is related to the proper valuation of the assets, the liabilities, and the equity balances. Valuation of the balance sheet items must be correct as overvalued or undervalued accounts will result in the wrong representation of the financial facts. It is important that the valuation is done properly to reflect a true and fair position of the financial position of the company.

List of Audit Assertions Related to Classes of Transactions

#1 – Occurrence

This refers to the fact that all the transactions recorded in the financial statements have actually occurred and are related to the stated entity.

#2 – Completeness

This is pertaining to the fact that all the transactions which were supposed to be recognized have been recorded in the financial statements completely and comprehensively.

#3 – Accuracy

This refers to the fact that all the transactions have been recognized accurately at their correct amounts. For instance, any adjustments required have been correctly reconciled and accounted for in the statements.

#4 – Cut-off

This refers to the fact that all the transactions have been recorded in the appropriate accounting periods. Transactions like prepaid and accrued expenses have to be recognized correctly in the financial statements.

#5 – Classification

This type of assertion is to confirm that all the transactions have been classified and presented properly in the financial statements.

List of Audit Assertions Related to Presentation and Disclosure

#1 – Occurrence

This refers to the presentation of all the transactions and the disclosure of all the events in the financial statements and confirms that they have occurred and are related to the entity.

#2 – Completeness

This is pertaining to all transactions, events, balances and other matters that should be disclosed in the financial statements and confirms their appropriate disclosure.

#3 – Classification & Understandability

This type is related to the comprehensiveness of the disclosed events, balances, transactions and other financial matters. It confirms that all have been classified correctly and presented clearly in such a manner that helps in the understanding of the information contained in the financial statements.

#4 – Accuracy & Valuation

This assertion confirms that the transactions, balances, events and other similar financial matters have been correctly disclosed at their appropriate amounts.

Relevance and Uses of Audit Assertions

The understanding of the audit assertions is very important from the point of view of investors because almost every financial metric that is used to evaluate a company’s stock is verified through these assertions. The audit assertions are carried out to verify the financial figures that are computed using data from the company’s financial statements. If in case the figures are inaccurate, then that would obviously result in a misrepresentation of the financial metrics, which includes the price-to-book ratio (P/B) or earnings per share (EPS).

These are few of the financial metrics which are being commonly used by analysts and investors to evaluate the company stocks. During the process of an audit of a company’s financial statements, the main idea of an auditor is to check and confirm the reliability of the facts and the figures recognized in the financial statements and capture the facts truly and fairly in the audit assertions.

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