Assertions in Auditing Overview, Importance, and Types

These representations are commonly referred to as Audit Assertions, Management Assertions, and Financial Statement Assertions. When a business is audited, the reviewer job is to ensure that management’s assertions in the financial statements are verifiably true. To assess the validity of these claims, the auditor will conduct relevant tests such as reviewing invoices and viewing the items in question. When it comes to auditing balance sheet accounts, such as long-term assets and liabilities, the key assertions that an auditor will test are existence; rights and obligations; completeness and valuation. Financial statement assertions are claims made by companies that attest that the information on their financial statements is true and accurate. Information related to the assertions is found on corporate balance sheets, income statements, and cash flow statements.

These assertions relate to the income statement and balance sheet as well. So, these assertions apply to both classes of transactions and account balances. As with completeness, auditors use cut-off to determine transactions are recorded within the proper accounting period.

This standard explains what constitutes audit evidence and establishes requirements regarding designing and performing audit procedures to obtain sufficient appropriate audit evidence. The goal for companies making such assertions is to minimize (or, ideally, avoid) the risk of material misstatement by failing to provide financial data that is, in fact, complete and accurate. Organizations of all sizes and types, from megacorporations to small businesses to nonprofits, prepare financial statements they are obliged to prepare and present as transparently and accurately as possible when audited.

One would expect these assertion examples to be addressed in an audit. Each also provides the assertion meaning or definition to help one understand how each is used in an assessment. 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.

Key Management Assertions Related to Long-Term Assets & Liabilities

Stakeholders will get the clear understanding they need, and your team will have useful and accurate data they can rely on for effective financial planning and decision making. SOX also created the Public Company Accounting Oversight Board (PCAOB)—an organization intended to assess the work performed by public accounting firms to independently assess and opine on management’s assertions. The PCAOB’s Auditing Standard number 5 is the current standard over the audit of internal control over financial reporting. If the auditor finds that the claims are inappropriate, it has implications for the audit report of the entity. The extensive level of assurance gives more reasonable confidence to the auditor. The audit report is the main thing investors search for in the whole set of annual reports.

When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. The assertion of accuracy and valuation is the statement that all figures presented in a financial statement are accurate and based on the proper valuation of assets, liabilities, and equity balances. The Financial Accounting Standards Board (FASB) establishes accounting standards in the United States. These are regulations that companies must follow when preparing their financial statements. The FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP).

Financial information is appropriately presented and described, and disclosures are clearly expressed. Get Mark Richards’s Software Architecture Patterns ebook to better understand how to design components—and how they should interact.

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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. The existence assertion verifies Management assertions 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. When performing an audit, it is the auditor’s job to obtain the necessary evidence to verify the assertions made in the financial statements.

• It is the auditor’s job to find evidence of whether management’s assertions can be corroborated, and you can be sure auditors can smell fraud.
• In this case, an auditor can examine the accounts receivable aging report to determine if bad debt allowances are accurate.
• Account balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity.

It is the auditor’s responsibility to determine that these items are properly disclosed in the financial statements. The valuation assertion is used to determine that the financial statements presented have all been recorded at the proper valuation. The rights and obligations assertion states that the company owns and has the ownership rights or usage rights to all recognized assets.

How does the concept of management assertions help the auditor in auditing an entity’s financial…

Different audit assertions include completeness, existence, accuracy, occurrence, valuation, cut-off, rights and obligations etc. Further, some assertions are applicable on the balance sheet and some on the income statement. In order to verify management claims/assertions, the auditors perform audit procedures to ensure these management claims are accurate.

These assertions attest that the preparers abided by the necessary regulations and accounting standards when preparing the financial statements. Also known as management assertions or financial statement assertions, audit assertions are the claims made by management certifying the financial statements presented are complete and accurate. They may be explicit (i.e., stated directly) or implicit (i.e., implied rather than directly stated). It is the third assertion type that can fall under both transaction-level assertions and account balance assertions. It relates to the presentation and disclosure of financial statements.

Type 1 audits cover the same areas; however, the auditor’s opinion only addresses the suitability of the design of controls at a point in time. There is no assurance that controls were operating effectively over a period of time. For additional information, check out our blog on SOC Report Types (1 vs 2). Inventory is another area that auditors may review to determine that inventory is properly valued and recorded using the appropriate valuation methods. Some of these include reviewing accounts and reconciliation of payables to supplier statements.

Which Audit Procedures Are Usually the Most Useful for Auditing the Existence and Rights Assertions?

Here, auditors’ work begins and they need to verify and ensure claims made by management are appropriate. Auditors use the valuation assertion to confirm all financial statements are recorded with the proper value. This is important in understanding (for example) a company’s debt profile or ensuring stakeholders have a properly contextualized grasp of readily available assets and cash flow.

Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. Issued by the International Accounting Standards Board (IASB), the purpose of the IFRS is to provide a consistent, comprehensive set of transparent and globally applicable accounting auditing standards. However, it is difficult to measure whether the statement is indeed true. Similarly, with financial statements, it is difficult to determine what financial information is free from material misstatement. 3/ When using the work of a specialist engaged or employed by management, see AU sec. 336, Using the Work of a Specialist.

The role of the auditors is to analyze the underlying facts to decide whether information provided by management is fairly presented. Auditors design audit tests to analyze information in order to determine whether management’s assertions are valid. To accomplish this, audit tests are created to address general audit objectives.

11/ AU sec. 329, Substantive Analytical Procedures, establishes requirements on performing analytical procedures as substantive procedures. Accuracy & Valuation Assertion – Transactions, events, balances, and other financial matters have been disclosed accurately at their appropriate amounts. For these, the auditor needs to verify the backup documents which claim such investments have been made by the company. Also, the auditor may ask for third-party verification of the balance as of the said date. However, knowing what these assertions are and what an auditor will be looking for during the audit process can go a long way toward being better prepared for one.

Thus, audit assertions are the major test checks for the auditor to opine whether the financial statements are free from material misstatement. There are generally five accounting assertions that the preparers of financial statements make. They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. The assertion of existence is the assertion that the assets, liabilities, and shareholder equity balances appearing on a company’s financial statements exist as stated at the end of the accounting period that the financial statement covers. 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.

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This assertion confirms the liabilities, assets, and equity balances recorded in a financial statement actually (you guessed it) exist. The auditor is required to collect whatever evidence is necessary to establish a connection between the values on the document and their real world counterparts. Management assertions, in the context of an audit, are representations made by a company’s management that are embodied in financial statements. They are essentially the claims management makes regarding the company’s financials. There are numerous audit assertion categories that auditors use to support and verify the information found in a company’s financial statements. The general audit objectives described in Exhibit 7-2 may be applied to any category of transaction and the related account balances.

John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor’s and master’s degree in accounting, as well as a Juris Doctor. You can test the authenticity of the existence of the assertions by physically verifying all noncurrent assets and receivables.