Relevant Assertions in Financial Statement Audits

Classes of Transactions – Income statement accounts usually use these assertions. The timing of the audit procedure used to test the assertion or control. The following auditing standard is not the current version and does not reflect any amendments effective on or after December 31, 2016. The current version of the auditing standards can be found here. The components are assets, liabilities, expenses, and revenue. The auditor does this with the help of GAAP. An external document further supports this to provide evidence regarding the occurrence of the transaction.

The auditor should exercise due care to determine the legitimacy of the address of the person to whom receivable confirmation is being sent. The goal for companies making such assertions is to minimize the risk of material misstatement by failing to provide financial data that is, in fact, complete and accurate. Financial statements have financial statement level risks such as management override or the intentional overstatement of revenues. These sometimes affect assertion level risk. For example, the intentional overstatement of revenues has a direct effect upon the existence assertion for receivables and the occurrence assertion for revenues. Therefore, even when you identify financial statement level risks, consider whether they might affect assertion level risks as well. Completeness Assertion – All transactions, balances, events, and other matters that should have been disclosed have been disclosed in the financial statements.

Assertions related to Presentation and Disclosures:

The assertion of rights and obligations is a basic assertion that all assets and liabilities included in a financial statement belong to the company issuing the statement. Put simply, the company confirms that it has legal authority and control of all the rights and obligations highlighted in the financial statements.

• It concerns brand reputation, intellectual property, and customer loyalty.
• Each also provides the assertion meaning or definition to help one understand how each is used in an assessment.
• Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.
• Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are so included.

The effort must extend beyond the confines of the accounting records to persuasive evidence of the existence of the tangible or intangible asset or liability. Pervasive financial assertions are those that have a wider effect on a company’s finances. These, too, are included in the various financial documents that a company uses.

Ensuring Company Financial Statement Assertions Are Accurate

For example, an audit of cash would include verifying the balance as well as reviewing cancelled checks and bank audit assertions statements. Which of the following is a management assertion regarding account balances at the period end?

• All transactions or account balances should reflect the net of all the events, and if there is anything that might be of interest to stakeholders, it must be duly disclosed in full.
• Inherent risk is assessed at high for occurrence and completeness.
• Type I assertions address matters within management’s control and relate to significant balances in the financial statements.

Materiality is one of the most important concepts in auditing. It is the determination of whether an error, omission or misstatement is material enough to be a concern. Audit procedures that are designed to detect material misstatements at the assertion level are known as substantive procedures. List three different types of substantive procedures and briefly describe each.

Examples of Internal Controls

They verify that the items in the documents do, in fact, exist as observed by the auditor. These can be done with assets such as inventory, cash, shares and securities. This physical examination gives small business owners greater assurance that company records represent business assets accurately. Alternatively, what if the accounts payable completeness assertion is assessed at high and all other assertions are at low to moderate?

• All assets, liabilities and equity balances that were supposed to be recorded have been recognized in the financial statements.
• If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be .
• While assertions are made in all aspects of life, in an accounting or business setting, most people think of a company’s financial statements, or the audit of the financial statements, when they think of assertions.
• In other words, these are straightforward assertions about the various financial positions of the company.
• Audit entity owns or controls the inventory recognized in the financial statements.

While in the warehouse, the auditor makes physical counts of other items of and traces them to the inventory ledger–support for completeness. In testing for existence, the auditor should seek evidence outside the books for that which has been recorded. The effort cannot stop with finding supporting debits and credits in a book of original entry.

How Can a System and Organization Controls (SOC) Report Help?

The main premise is that for each line in the financial statements, the auditors’ primary objective is to ensure that there are no material misstatements in the given assertions. The cut-off assertion is used to determine whether the transactions recorded have been recorded in the appropriate accounting period. Payroll and inventory balances are often checked for cut-off accuracy to determine that the activity that took place was recorded in the appropriate period.

It relates to the presentation and disclosure of financial statements. Accounting management assertions are implicit or explicit claims made by financial statement preparers. These assertions attest that the preparers abided by the necessary regulations and accounting standards when preparing the financial statements.

Limitation of Scope in an Audit Report

They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. Classes of Transactions are the building blocks of an audit. Without classes there is no basis for planning, conducting or reporting on work performed. For example, a financial audit will have a series of classes such as cash, accounts receivable and inventory. The auditor must also decide the level of evidence to be gathered for each class which is then used in making an assertion about whether that particular account balance or item is free from material misstatement.