9/10/2019 Assertions in the Audit of Financial Statements

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Audit

Purpose of Audit
Limitations of Audit
Types of Audit
True and Fair View
Assertions in the Audit of Financial Statements
Audit Risk
Definition
Audit Risk & Business Risk
Audit Assertions are the implicit or explicit claims and representations made by the
Audit Assertions management responsible for the preparation of financial statements regarding the
appropriateness of the various elements of financial statements and disclosures.
Accounting for Convertible Bonds
Audit Assertions are also known as Management Assertions and Financial Statement
Accounting Puzzles Assertions.

Topic Contents

1. Definition

2. Explanation

3. Types & Examples

4. Use and Application

5. Purpose & Importance

Explanation
In preparing financial statements, management is making implicit or explicit claims (i.e.
assertions) regarding the recognition, measurement and presentation of assets, liabilities,
equity, income, expenses and disclosures in accordance with the applicable financial
reporting framework (e.g. IFRS).

For example, if a balance sheet of an entity shows buildings with carrying amount of $10
million, the auditor shall assume that the management has claimed that:

The buildings recognized in the balance sheet exist at the period end;
The entity owns or controls those buildings;
The buildings are valued accurately in accordance with the measurement basis;
All buildings owned and controlled by the entity are included within the carrying
amount of $10 million.

Types & Examples

Assertions may be classified into the following types:

Assertions relating to classes of transactions

Assertions Explanation Examples: Salaries & Wages Cost

Occurrence Transactions Salaries & wages expense has been

recognized in the incurred during the period in respect of
financial statements the personnel employed by the entity.
have occurred and Salaries and wages expense does not
relate to the entity. include the payroll cost of any
unauthorized personnel.

Completeness All transactions that Salaries and wages cost in respect of all
were supposed to be personnel have been fully accounted
recorded have been for.
recognized in the
financial statements.

Accuracy Transactions have been Salaries and wages cost has been
recorded accurately at calculated accurately. Any adjustments
such as tax deduction at source have

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9/10/2019 Assertions in the Audit of Financial Statements
their appropriate
amounts.
Cut-off Transactions have been
recognized in the
correct accounting
periods.
Automate Classification Transactions have been
Manual classified and
presented fairly in the
financial statements.
Processes
Assertions relating to assets, liabilities and equity balances at the period end
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Assertions Explanation
done faster via
automation. Existence Assets, liabilities and
equity balances exist at
Start your free the period end.
trial.
Completeness All assets, liabilities and
equity balances that
were supposed to be
recorded have been
recognized in the
financial statements.
Rights & Entity has the right to
Obligations ownership or use of the
recognized assets, and
the liabilities recognized
in the financial
statements represent
the obligations of the
entity.
Valuation Assets, liabilities and
equity balances have
been valued
appropriately.
Assertions relating to presentation and disclosures
Assertions Explanation
Occurrence Transactions and
events disclosed in the
financial statements
have occurred and
relate to the entity.
Completeness All transactions,
balances, events and
other matters that
should have been
disclosed have been
disclosed in the
financial statements.
Classification & Disclosed events,
Understandability transactions, balances
and other financial
matters have been
classified appropriately
and presented clearly in
a manner that promotes
the understandability of
information contained in
https://accounting-simplified.com/audit/introduction/audit-assertions.html
been correctly reconciled and
accounted for.
Salaries and wages cost recognized
during the period relates to the current
accounting period. Any accrued and
prepaid expenses have been accounted
for correctly in the financial statements.
Salaries and wages cost has been fairly
allocated between:
-Operating expenses incurred in
production activities;
-General and administrative expenses;
and
-Cost of personnel relating to any self-
constructed assets other than inventory.
Examples: Inventory balance
Inventory recognized in the balance
sheet exists at the period end.
All inventory units that should have
been recorded have been recognized in
the financial statements. Any inventory
held by a third party on behalf of the
audit entity has been included in the
inventory balance.
Audit entity owns or controls the
inventory recognized in the financial
statements. Any inventory held by the
audit entity on account of another entity
has not been recognized as part of
inventory of the audit entity.
Inventory has been recognized at the
lower of cost and net realizable value in
accordance with IAS 2 Inventories. Any
costs that could not be reasonably
allocated to the cost of production (e.g.
general and administrative costs) and
any abnormal wastage has been
excluded from the cost of inventory. An
acceptable valuation basis has been
used to value inventory cost at the
period end (e.g. FIFO, AVCO, etc.)
Examples: Related Party
Disclosures
Transactions with related parties
disclosed in the notes of financial
statements have occurred during the
period and relate to the audit entity.
All related parties, related party
transactions and balances that should
have been disclosed have been
disclosed in the notes of financial
statements.
The nature of related party
transactions, balances and events has
been clearly disclosed in the notes of
financial statements. Users of the
financial statements can clearly
determine the financial statement
captions affected by the related party
transactions and balances and can
easily ascertain their financial effect.
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9/10/2019 Assertions in the Audit of Financial Statements
the financial
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statements.

Accuracy & Transactions, events, Related party transactions, balances

Valuation balances and other and events have been disclosed
financial matters have accurately at their appropriate
been disclosed amounts.
accurately at their
appropriate amounts.

Use and Application

Auditors are required by ISAs to obtain sufficient & appropriate audit evidence in respect of
all material financial statement assertions. The use of assertions therefore forms a critical
element in the various stages of a financial statement audit as described below.

Stage of Audit Application of Assertions

Planning As part of the risk assessment procedures, auditors are required

to understand the entity and its environment including the
assessment of the risk of material misstatement (ROMM) due to
fraud and error at the financial statement and assertion level.
(ISA 315.3 )

The assessment of ROMM at the financial statement and

assertion level provides the basis for determining the nature,
timing and extent of audit procedures that are necessary to
obtain sufficient and appropriate audit evidence in response to
those assessed risks. (ISA 200.A36)

Testing Substantive tests are performed to identify material

misstatements at the assertion level. In case of assertions
whose ROMM has been assessed as significant and no tests of
control are planned to be performed, the substantive procedures
should include tests of detail (i.e. substantive analytical
procedures alone cannot be considered as sufficient and
appropriate audit evidence for assertions with a significant risk
of material misstatement. (ISA 330.21)

Tests of control (TOCs) are performed to assess the operating

effectiveness of controls at the financial statement and assertion
level. TOCs are necessary to validate the auditor's expectation
of the operating effectiveness of controls (as acquired from the
risk assessment procedures performed at the planning stage)
and also in case where the performance of substantive
procedures alone cannot provide sufficient and appropriate audit
evidence in respect of a specific assertion. (ISA 330.8)

Completion Auditor shall conclude whether sufficient and appropriate audit

evidence has been obtained for all material financial statement
assertions taking into account any revisions in the assessment
of ROMM at the assertion level. (ISA 330.25-6)

Where an auditor is unable to obtain sufficient and appropriate

audit evidence in respect of a material financial statement
assertion, he is required to modify the audit report accordingly.
(ISA 330.27)

Purpose & Importance

Assertions assist auditors in considering a wide range of issues that are relevant to the
authenticity of financial statements. The consideration of management assertions during
the various stages of audit helps to reduce the audit risk.

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9/10/2019 Assertions in the Audit of Financial Statements

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