What Are Audit Assertions and Why They Are Important

All transactions that were supposed to be recorded have been recognized in the financial statements. Transactions recognized in the financial statements have occurred and relate to the entity. For certified public accountants (CPAs) and other auditors, Bookkeeping for Chiropractors determining the veracity of these assertions involves testing various aspects of the financial records and disclosures. Furthermore, the auditor will recalculate the revaluation surplus in accordance with the provisions of IAS 16, Property, Plant and Equipment to confirm the correctness of the accounting entries relating to revaluation surplus. The amount added to revaluation surplus should be the difference between the net book value of PPE and the revalued amounts.

Valuation and allocation

• Hence, the financial statements contain management’s assertions about the transactions, events and account balances and related disclosures that are required by the applicable accounting standards such as US GAAP or IFRS.
• The implicit or explicit claims by the management on the preparation and appropriateness of financial statements and disclosures are known as management assertions.
• Any accrued and prepaid expenses have been accounted for correctly in the financial statements.
• Accuracy is concerned with the appropriate recording of transaction amounts, while cut-off assertions verify that transactions are recorded in the correct accounting period.
• Your financial statements are your promise or your assertion that everything contained in those statements is accurate.

Relevant test – reperformance of calculations on invoices, payroll, etc, and the review of control account reconciliations are designed to provide assurance about accuracy. Accuracy – this means that there have been no errors while preparing documents or in posting transactions to ledgers. The reference to disclosures being appropriately measured and described means that the figures and explanations are not misstated. Completeness – this means that transactions that should have been recorded and disclosed have not been omitted. This article will focus on assertions as identified by ISA 315 (Revised 2019) and also provides useful guidance to candidates on how to tackle questions dealing with these.

Overview: What are audit assertions?

Audit assertions, financial statement assertions, or management’s assertions, are the claims made by the management of the company on financial statements. The moment the financial statements are produced, the assertions or the claims of management also exist, e.g., all items in the income statement are assured to be complete and accurate, petty cash etc. Valuation and allocationThis means that all items have been included in the financial statements at appropriate amounts according to company policy and the relevant financial reporting framework. Furthermore, any allocations or valuation adjustments required (like impairment) have been made and financial and other information is disclosed fairly and at appropriate amounts. Your financial statements are your promise or your assertion that everything contained in those statements is accurate.

• For instance, if a company reports having $1 million in inventory, the auditor must confirm that this inventory is physically present and owned by the company.
• Occurrence and rights and obligations assertions relate to the disclosure of events and transactions that have occurred and pertain to the entity.
• Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the VALUATION of X Co’s inventory.
• Auditors consider the entity’s track record, looking for patterns of inaccuracies or misstatements in prior periods.
• Classification – that transactions are recorded in the appropriate accounts – for example, the purchase of raw materials has not been posted to repairs and maintenance.
• Salaries & wages expense has been incurred during the period in respect of the personnel employed by the entity.

The Future of FP&A: How The Role Is Evolving With The Use Of Real-Time Data

Presentation – this means that the descriptions and disclosures of transactions are relevant and easy to understand. There is a reference to transactions being appropriately aggregated or disaggregated. Disaggregation is the separation of an item, or an aggregated group of items, into component parts. The notes to the financial statements are often used to disaggregate totals shown in the statement of profit or loss. Materiality needs to be considered when judgements are made about the level of aggregation and disaggregation. Management assertions are primarily used by the external auditors at the time of audit of the company’s financial statements.

Audit Assertions:

Classification and understandability assertions require that financial information is appropriately presented and that disclosures are clear and comprehensible to users. Finally, accuracy and valuation assertions ensure that financial and other information is disclosed fairly and at appropriate amounts. Auditors review these assertions by examining the financial statements and accompanying notes, ensuring that the disclosures are complete, clearly presented, and free from material misstatements.

• Transactions and events disclosed in the financial statements have occurred and relate to the entity.
• Both are fundamental to the audit process, with the former being the subject of the audit and the latter guiding the methodology of the audit.
• Completeness of account balances ensures that all assets, liabilities, and equity interests that should have been recorded have been included in the financial statements.
• The points made above regarding aggregation and disaggregation of transactions also apply to assets, liabilities and equity interests.
• Furthermore, the historical accuracy of management’s assertions plays a role in their current validity.
• It requires auditors to challenge the assumptions and estimates made by management, especially in areas susceptible to significant judgment or where there is a higher risk of management bias.

Business is Our Business

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. This is particularly important for those accruing payroll or reporting inventory levels. Auditors must also ensure that their evaluation of assertions is comprehensive, covering all financial statement components. They must consider the interrelationships between financial statement elements and how misstatements in one area could affect another. This holistic approach ensures that auditors do not view assertions in audit management assertions isolation but understand their collective impact on the financial statements’ integrity. Explore the critical role of management assertions in shaping financial audits and the auditor’s duty to assess their validity for accurate reporting.