Assertions in the Audit of Financial Statements
Audit Assertions are the implicit or explicit claims and representations made by the management responsible for the preparation of financial statements regarding the appropriateness of the various elements of financial statements and disclosures.
Audit Assertions are also known as Management Assertions and Financial Statement Assertions.
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 recognized in the financial statements have occurred and relate to the entity.||Salaries & wages expense has been incurred during the period in respect of the personnel employed by the entity. Salaries and wages expense does not include the payroll cost of any unauthorized personnel.|
|Completeness||All transactions that were supposed to be recorded have been recognized in the financial statements.||Salaries and wages cost in respect of all personnel have been fully accounted for.|
|Accuracy||Transactions have been recorded accurately at their appropriate amounts.||Salaries and wages cost has been calculated accurately. Any adjustments such as tax deduction at source have been correctly reconciled and accounted for.|
|Cut-off||Transactions have been recognized in the correct accounting periods.||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.|
|Classification||Transactions have been classified and presented fairly 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.
|Assertions relating to assets, liabilities and equity balances at the period end|
|Assertions||Explanation||Examples: Inventory balance|
|Existence||Assets, liabilities and equity balances exist at the period end.||Inventory recognized in the balance sheet exists at the period end.|
|Completeness||All assets, liabilities and equity balances that were supposed to be recorded have been recognized in the financial statements.||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.|
|Rights & Obligations||Entity has the right to ownership or use of the recognized assets, and the liabilities recognized in the financial statements represent the obligations of the entity.||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.|
|Valuation||Assets, liabilities and equity balances have been valued appropriately.||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.)|
|Assertions relating to presentation and disclosures|
|Assertions||Explanation||Examples: Related Party Disclosures|
|Occurrence||Transactions and events disclosed in the financial statements have occurred and relate to the entity.||Transactions with related parties disclosed in the notes of financial statements have occurred during the period and relate to the audit entity.|
|Completeness||All transactions, balances, events and other matters that should have been disclosed have been disclosed in the financial statements.||All related parties, related party transactions and balances that should have been disclosed have been disclosed in the notes of financial statements.|
|Classification & Understandability||Disclosed events, transactions, balances and other financial matters have been classified appropriately and presented clearly in a manner that promotes the understandability of information contained in the 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.|
|Accuracy & Valuation||Transactions, events, balances and other financial matters have been disclosed accurately at their appropriate amounts.||Related party transactions, balances and events have been disclosed 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)
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)
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.