Audit Assertions

Explicit or implicit claims and representations made by a company regarding its financial statements

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 or internal controls, and financial reporting processes. In financial statements, assertions about the recognition, measurement, presentation, and disclosure of financial information are included.

We know that financial statements are derived from trial balances that ultimately lead back to the general ledger, journals, and source documents. Remember this flowchart:

 

Audit Assertions

 

When going about an audit of the financial statements, what would be the logical approach? Should we audit each line item separately (i.e. cash, accounts receivable, inventory, revenue, expense etc.) or is there a more efficient way? In reality, individual line items are not audited separately, and audits are divided into cycles.

Cycles are groups of similar accounts that affect each other and thus, audits are typically done using a cycles approach. Some examples of cycles are the RRR (Revenues, Receivables, and Receipts) cycle and the PPP (Purchases, Payables, and Payments) cycle. For example, a revenue recognition not only credits the revenue account but also debits the accounts receivable account. In addition, when the cash is collected from the customer regarding that specific sales entry, the cash account is debited which also credits the account receivable account.

 

Management Assertions

Many people often think that the financial statements are the auditor’s responsibility. However, assembling the financial statements is the responsibility of the management (i.e. the client) and evaluating the financial statements against an established criterion is the auditor’s responsibility. Hence, when preparing financial statements, management makes assertions about each account and its related note disclosures. Auditors will then use these assertions for the account balances, classes of transactions, and presentation and disclosures in assessing the risk of material misstatement and designing audit procedures. Assertions are directly related to GAAP.

 

The Different Assertions

As noted above, there are three general categories of assertions:

  • Account Balances – They are generally balance sheet accounts (i.e. at the period end)
  • Classes of Transactions – They are generally income statement accounts (i.e. for the period)
  • Presentation and Disclosure – How different accounts are presented in the financial statements (long-term asset vs current asset or long-term liability vs current liability)

 

Assertions - Example

 

 

Examples

 

StatementType of AssertionSpecific Assertion
Uncollectible receivables have been allowed forAccount BalanceValuation
All leases have been fully included in capital assets Account BalanceCompleteness
Inventory is physically present in the warehouseAccount BalanceExistence
Sales revenue transactions include actual shipments made to real customersClass of TransactionOccurrence
Investment income has been properly excluded from sales revenueClass of TransactionClassification
Obtain the last 5 receiving reports for 2016 and the first 5 receiving reports for 2017 to ensure that the shipment has been recorded in the proper periodClass of TransactionCut-off
Ask management whether any of the inventory is on a consignment basisAccount BalanceRights

 

Related Readings

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