Audit Assertions Assertions to test in audit process

This assertion confirms the liabilities, assets, what are the 7 audit assertions and equity balances recorded in a financial statement actually (you guessed it) exist. It’s critically important for all transactions in a given accounting period to be recorded properly. For certified public accountants (CPAs) and other auditors, determining the veracity of these assertions involves testing various aspects of the financial records and disclosures. The nature of related party transactions, balances and events has been clearly disclosed in the notes of financial statements.

These confirmations are useful because they can provide reliable audit evidence on the existence of a company’s assets. They are more reliable than merely going over company invoices or using analytical processes because a third party’s records are involved. External confirmations can also verify rights assertions made by management, which is an area where physical inspection is lacking. As you consider the significant account balances, transaction areas, and disclosures, specify the relevant assertions. The auditor also might select specific items to obtain an understanding about matters such as the nature of the company or the nature of transactions.

Accuracy

Presentation – this means that the descriptions and disclosures of assets and liabilities are relevant and easy to understand. The points made above regarding aggregation and disaggregation of transactions also apply to assets, liabilities and equity interests. In order to test completeness, the procedure should start from the underlying documents and check to the entries in the relevant ledger to ensure none have been missed. To test for occurrence the procedures will go the other way and start with the entry in the ledger and check back to the supporting documentation to ensure the transaction actually happened. Sufficient and appropriate disclosures have been made on related transactions, events and account balances.

Presentation and Disclosure Assertion

For example, if the completeness assertion reveals that certain liabilities were not recorded, management can take corrective actions to ensure that all future transactions are accurately captured. Rights and obligations assertions confirm that the entity holds or controls the rights to assets and has obligations to liabilities. This is essential for understanding the true ownership and responsibility of the reported items. By providing a decentralized and immutable ledger, blockchain ensures that transactions are recorded accurately and cannot be altered retroactively. This transparency and security can significantly reduce the risk of fraud and errors, making it easier for auditors to verify the existence and completeness of transactions.

• Auditors must exercise professional skepticism and use specialized techniques to evaluate the reasonableness of these estimates, which can be both time-consuming and complex.
• In the same manner, the assertion about classification is about the transactions and events, and their proper classification into the relevant accounts.
• The audit process is inevitably a very important process during the financial year of the company.
• These categories help auditors focus their efforts on specific areas of the financial statements, ensuring a comprehensive evaluation of the company’s financial health.
• Auditors assess valuation by reviewing the methods and assumptions used by management to estimate these amounts, and by comparing them to industry standards and historical data.

A. Occurrence and Rights and Obligations

In the same manner, the assertion about classification is about the transactions and events, and their proper classification into the relevant accounts. Accuracy pertaining to different accounting standards is also an important premise because it has to be ensured that all the relevant entries have been appropriately measured and duly recorded. These assertions include matters pertaining to the classification of accounts, as well as ones pertaining to assets, liabilities, and equity at the end of the given period. Therefore, it can be seen that when management prepares financial statements, they make five assertions regarding each line in the financial statements. Below is a summary of the assertions, a practical application of how the assertions are applied and some example audit procedures relevant to each.

If the figures are inaccurate, that will result in a misrepresentation of the financial metrics, including the price-to-book value ratio (P/B) or earnings per share (EPS). These procedures involve comparing financial data with expected values based on historical trends, industry benchmarks, or other relevant metrics. By identifying significant deviations from these expectations, auditors can pinpoint areas that may require further investigation. For instance, if a company’s gross margin significantly deviates from industry norms, it could indicate issues with revenue recognition or cost allocation. Analytical procedures not only help in identifying potential misstatements but also provide a broader perspective on the company’s financial performance and trends. Moreover, assertions are integral to the auditor’s opinion on the financial statements.

Transaction Level

The assertion is that all business events to which the company was subjected were recorded. The assertion is that all transactions were recorded within the correct reporting period. For example, auditors may use a re-performance audit procedure in the test of controls on the bank reconciliation procedure that the client already has done. For example, auditors may perform recalculation on the depreciation of fixed assets to test their valuation assertion. For example, auditor may use the inspection procedure to test the occurrence assertion of expense transactions by vouching them to receiving reports, supplier’s invoice and purchase orders. Audit assertions confirm the existence of inventory, its proper value, and ownership by the company.

Existence

For example, an auditor might verify a sales transaction by examining the corresponding sales invoice, shipping documents, and payment receipts. Audit assertions are the claims made by management regarding the accuracy and completeness of the financial statements. These assertions form the basis upon which auditors design their procedures and tests. One of the primary assertions is existence, which verifies that assets, liabilities, and equity interests actually exist at a given date.

Audit assertions such as occurrence, accuracy, and cut-off are usually tested by inspecting the documents to support the accounting transactions in the company’s records (vouching). And completeness assertion is usually tested by selecting documents and trace them back to the company’s records (tracing). Inspection of records or documents is the process of gathering evidence by examining the records or documents. This type of audit procedures may be done by vouching the transaction records to the supporting documents or tracing the supporting documents to transaction records.

Risk of material misstatement is the risk that the material misstatement can occur on financial statements and the internal controls can’t prevent or detect it. An unqualified, or clean, audit opinion means that the auditor has not identified any material misstatement as a result of his or her review of the financial statements. The audit can be conducted internally by employees of the organization or externally by an outside Certified Public Accountant (CPA) firm.

• Auditors examine supporting documents, such as title deeds, contracts, and loan agreements, to ensure that the company possesses the rights to its assets and is obligated to settle its liabilities.
• This not only helps in rectifying current issues but also aids in enhancing the company’s internal controls and financial reporting processes.
• The auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.
• This type of assertion is related to the proper valuation of the assets, the liabilities, and the equity balances.
• It should be ensured that these classifications are done correctly because otherwise, it would result in an incorrect declaration of major line heads in the financial statements.

Financial statement assertions guide auditors in designing audit procedures and evaluating the results of those procedures. Assertions help auditors focus on specific risks of material misstatement and ensure that all aspects of the financial statements are addressed. Assertions related to account balances address the accuracy and completeness of the entity’s assets, liabilities, and equity at the reporting date.

The importance of assertions extends beyond mere compliance with accounting standards. They provide a structured approach for auditors to identify potential areas of risk and misstatement. For instance, if an auditor identifies discrepancies in the valuation assertion, it may indicate issues with how the company estimates the value of its assets, prompting a deeper investigation. This risk-based approach allows auditors to allocate their resources more effectively, focusing on areas that are more likely to contain errors or fraudulent activities.

List of Audit Assertions Related to Presentation and Disclosure

By doing so, you’ll be well-prepared to face the audit procedure with financial information that’s compliant, complete, and correct. Issued by the International Accounting Standards Board (IASB), the purpose of the IFRS is to provide a consistent, comprehensive set of transparent and globally applicable accounting auditing standards. It is important to have a proper classification so that the users of the financial statements are able to disaggregate and analyze them at their convenience.

Observation is the process that the auditors perform by looking at the procedures being performed by the client. This type of audit procedures provides evidence that the client’s procedures actually take place at the time the auditors perform the observation. For example, auditors may inquire clients to understand the business and control environment; or they may inquire about transactions or balances of financial statement line items. This assertion assures auditors that the company is not reporting fictitious assets or overstating liabilities. 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 understand the information contained in the financial statements.

The auditor is required to collect whatever evidence is necessary to establish a connection between the values on the document and their real world counterparts. For example, the costs of the payroll department only include the costs which are relevant to the current year. For example, it should be made sure that salaries and wages cost in respect of all personnel have been fully accounted for. Below are some examples which provide an indication, but not an exhaustive list of how assertions can be tested at FAU and AA. Relevant tests – Vouching the cost of assets to purchase invoices and checking depreciation rates and calculations. This article will focus on assertions as identified by ISA 315 (Revised 2019) and also provides useful guidance to candidates on how to tackle questions dealing with these.