The different financial statement assertions attested to by a company’s preparer of such statements include assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure. Financial statement assertions, also referred to as management assertions, are the explicit or implicit assertions made by a company regarding the fundamental accuracy of information contained in its financial statements. Put simply, this assertion assures that the information presented actually exists and is free from any fraudulent activity. There are five different financial statement assertions attested to by a company’s statement preparer. These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.
Muhammad Reza Naserzadeh, a staff member of the Iranian Consulate in Istanbul involved in the assassination plot, forged documents for Esfanjani to help him escape to Iran following the assassination. The following is a good explanation of the financial assertions as the pertain to ISA 135. The components are assets, liabilities, expenses, and revenue. Salaries & wages expense has been incurred during the period in respect of the personnel employed by the entity.
Obtaining an Understanding of the Company and Its Environment
This assertion is very closely related to the occurrence assertion for transactions. Account balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity. It should be ensured that these classifications are done correctly because otherwise, it would result in an incorrect declaration of major line heads in the financial statements. In the same manner, the assertion about classification is about the transactions and events, and their proper classification into the relevant accounts. It mentions how it’s important for the amounts and other relevant data for the truncations to be recorded in an appropriate manner.
As noted above, a company’s financial statement assertions are a company’s stamp of approval—that the information in its financial statements is a true representation of its financial position. This includes any information on the balance sheet, income statement, and cash flow statement, and pertains to each and every asset and liability that appears on these forms. Completeness is a crucial audit assertion since it relates to the balance sheet and income statement. For example, they must ensure companies have recognized all items in fixed assets that they must have.
Form of Confirmation Request
The auditor is not expected to be an expert in document authentication. 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. 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. Relevant tests – A review of the repairs and expenditure account can sometimes identify items that should have been capitalised and have been omitted from non–current assets. Reconciliation of payables ledger balances to suppliers’ statements is primarily designed to confirm completeness although it also gives assurance about existence.
- Financial accounting assertions are a very important part of auditing.
- For example, existence, rights, and cutoff might be relevant to cash, but not valuation (provided there is no foreign currency) or understandability.
- Inventory recognized in the balance sheet exists at the period end.
- That’s because there is no other way to hold the preparers of financial statements accountable.
- Not all assertions are relevant to all account balances or to all disclosures.
Together, these assertions help in preparing financial statements. As you consider the significant account balances, transaction areas, and disclosures, specify the relevant assertions. So you can determine the risk of material misstatement for each and create responses. Financial statement assertions are claims made by an organization’s management regarding its financial statements. The assertions form a theoretical basis from which external auditors develop a set of audit procedures.
Assertions as Scoping Tool
Auditors use numerous audit assertions when examining a company’s financial statements. Financial statements have financial statement level risks such as management override or the intentional overstatement of revenues. 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. If the goal of assessing risk is to quickly complete a risk assessment document (and nothing else), then assessing risk at the transaction level makes sense. But the purpose of risk assessment is to provide planning direction.
- This assertion is to ensure whether the items in the financial statements are classified in the right way.
- For example, the intentional overstatement of revenues has a direct effect upon the existence assertion for receivables and the occurrence assertion for revenues.
- In order to test completeness, the procedure should start from the underlying documents and check to the entries in the relevant ledger to ensure none have been missed.
- Financial statement assertions are statements or claims that companies make about the fundamental accuracy of the information in their financial statements.
- Relevant test – reperformance of calculations on invoices, payroll, etc, and the review of control account reconciliations are designed to provide assurance about accuracy.
- Auditors use audit assertions as guides to help guide their audit process.
5/ For an integrated audit, also see paragraph 28 of Auditing Standard No. 5. Inventory recognized in the balance sheet exists at the period end. Relevant tests – Vouching the cost of assets to purchase invoices and checking depreciation rates and calculations. Relevant tests – physical verification of non–current assets, circularisation of receivables, payables and the bank letter. Accuracy – this means that there have been no errors while preparing documents or in posting transactions to ledgers.
Some people may refer to these as audit assertions as they are evaluated during an audit of an entity’s financial statements. Auditors will employ a wide variety of procedures to test a company’s financial statements with respect to each of these assertions. Look at two or three of your audit files and review your risk assessments. Are you assessing risk at the transaction level or at the assertion level? Plan to spend more time in performing risk assessment procedures and documenting your risks at the assertion level—and possibly less time performing further audit procedures.
