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:
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)
Examples
| Statement | Type of Assertion | Specific Assertion |
|---|---|---|
| Uncollectible receivables have been allowed for | Account Balance | Valuation |
| All leases have been fully included in capital assets | Account Balance | Completeness |
| Inventory is physically present in the warehouse | Account Balance | Existence |
| Sales revenue transactions include actual shipments made to real customers | Class of Transaction | Occurrence |
| Investment income has been properly excluded from sales revenue | Class of Transaction | Classification |
| 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 period | Class of Transaction | Cut-off |
| Ask management whether any of the inventory is on a consignment basis | Account Balance | Rights |
