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Understanding Audit Assertions and Why They

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36 views

Understanding Audit Assertions and Why They

Uploaded by

Priyanka Mathur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Understanding Audit Assertions

and Why They’re Important


When financial statements are prepared, the preparer is asserting the fundamental accuracy of
those statements. Learn what the various audit assertions are and how they can impact your
business.

Assertions are characteristics that need to be tested to ensure that financial records
and disclosures are correct and appropriate. If assertions are all met for relevant
transactions or balances, financial statements are appropriately recorded.

Assertions are claims made by business owners and managers that the
information included in company financial statements -- such as
a balance sheet, income statement, and statement of cash flows -- is
accurate. These assertions are then tested by auditors and CPAs to verify
their accuracy.

Auditors use a variety of assertions when performing an audit. Image


source: Author
Overview: What are audit assertions?
Whether you’re with a Fortune 500 company, a nonprofit, or are a small
business owner, any time you prepare financial statements, you are
asserting their accuracy. Audit assertions, also known as financial
statement assertions or management assertions, serve as management’s
claims that the financial statements presented are accurate.
When performing an audit, it is the auditor’s job to obtain the necessary
evidence to verify the assertions made in the financial statements.
Whether you’re using accounting software or recording transactions in
multiple ledgers, the audit assertion process remains the same.

Types of assertions
There are numerous audit assertion categories that auditors use to
support and verify the information found in a company’s financial
statements.

1. Existence
The existence assertion verifies that assets, liabilities, and equity balances
exist as stated in the financial statement. For example, if a balance sheet
indicates inventory on hand for $10,000, it is the job of the auditor to
verify its existence.
The same process is used when verifying accounts receivable balances.
The auditor is tasked with authenticating the accounts receivable balance
as reported through a variety of means, including choosing a particular
accounts receivable customer and examining all related activity for that
particular customer.
Bank deposits may also be examined for existence by looking at
corresponding bank statements and bank reconciliations. Auditors may
also directly contact the bank to request current bank balances.

2. Occurrence
The occurrence assertion is used to determine whether the transactions
recorded on financial statements have taken place. This can range from
verifying that a bank deposit has been completed to authenticating
accounts receivable balances by determining whether a sale took place on
the day specified.

3. Accuracy
Accuracy looks at specific transactions and then checks the accuracy of
the recorded entry to determine whether the amounts are recorded
correctly. In many cases, an auditor will look at individual customer
accounts, including payments. to verify that the amount recorded as paid
is the same as received from the customer.

4. Completeness
Completeness helps auditors verify that all transactions for the period
being examined have been properly entered in the correct period.
For example, an auditor may want to examine payroll records to make
sure that all salaries and wages expenses have been recorded in the
proper period. This may include an examination of payroll records, a
payroll journal, an active employee list, and any payroll accruals that were
made and reversed in the period being examined.
Inventory can also play a large role in the completeness assertion, with
auditors looking at inventory transactions that took place during a specific
period by examining inventory levels and corresponding sales numbers to
determine that inventory was recorded properly.
Completeness, like existence, may examine bank statements and other
banking records to determine that all deposits that have been made for
the current period have been recorded by management on a timely basis.
Auditors may also look for any deposits in the bank that have not been
recorded.

5. Valuation
The valuation assertion is used to determine that the financial statements
presented have all been recorded at the proper valuation.
For instance, the reporting of a company's accounts receivable account
does not provide a guarantee that the customer will pay the accounts
receivable amount owed. In this case, an auditor can examine the
accounts receivable aging report to determine if bad debt allowances are
accurate.
Inventory is another area that auditors may review to determine that
inventory is properly valued and recorded using the appropriate valuation
methods.

6. Rights and obligations


Rights and obligations assertions are used to determine that the assets,
liabilities, and equity represented in the financial statements are the
property of the business being audited. In other words, if your small
business is being audited, the auditor may ask for proof that the cash
balance of your bank account belongs to the business.
Auditors may look at other assets as well to determine whether they are
the property of the business or are just being used by the business.
Liabilities are another area that auditors will review to determine that any
bills paid from the business belong to the business and not the owner.

7. Classification
The classification assertion addresses the financial statements
themselves. Are the statements presented properly in an acceptable
format? Do they include all of the necessary information and related
disclosures? Are they easy to understand?
For example, accounts payable notes payable and interest payable are all
considered payables, but they are all very separate entities and should be
reported as such. For example, notes payable transactions should never
be classified as an accounts payable transaction, with the same being true
for interest payable transactions.
It is the auditor’s responsibility to determine that these items are properly
disclosed in the financial statements.

8. Cut-off
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. This is particularly important for those accruing
payroll or reporting inventory levels.
The audit assertions above are used in three different categories.
1. Transaction level assertions
2. Account balance assertions
3. Presentation and disclosure assertions
TRANSACTION LEVEL ACCOUNT BALANCE PRESENTATION &
ASSERTIONS ASSERTIONS DISCLOSURE
ASSERTIONS

(Used when examining (Used when examining (Used to determine


journal entries and asset, liability, and proper format and
transactions) equity totals) clarity)

Completeness, Accuracy, Rights & Obligations, Accuracy, Occurrence,


Classification, Occurrence, Existence, Completeness,
Cut-Off Completeness, Valuation Classification

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