Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements [management] is making to its users. These assertions are relevant to auditors performing a financial statement audit in two ways. First, the objective of a financial statement audit is to obtain sufficient appropriate audit evidence to conclude on whether the financial statements present fairly, in all material respects, the financial position of a company and the results of its operations and cash flows.[1] In developing that conclusion, the auditor evaluates whether audit evidence corroborates or contradicts financial statement assertions.[2] Second, auditors are required to consider the risk of material misstatement through understanding the entity and its environment, including the entity's internal control.[3][4] Financial statement assertions provide a framework to assess the risk of material misstatement in each significant account balance or class of transactions.[5]
Both United States and International auditing standards include guidance related to financial statement assertions, although the specific assertions differ. The PCAOB and the IFAC address this topic in AS 1105[6] [updated from AS 15[7] as of December 31, 2016] and ISA 315, respectively.[4] The American Institute of Certified Public Accountants identifies the following financial statement assertions:[8]
- Transactions and events
- Occurrence — the transactions recorded have actually taken place.
- Completeness — all transactions that should have been recorded have been recorded.
- Accuracy — the transactions were recorded at the appropriate amounts.
- Cutoff — the transactions have been recorded in the correct accounting period.
- Classification — the transactions have been recorded in the appropriate caption.
- Accounts balances as of period end
- Existence — assets, liabilities and equity balances exist.
- Rights and Obligations — the entity legally controls rights to its assets and its liabilities faithfully represent its obligations.
- Completeness — all balances that should have been recorded have been recorded.
- Valuation and Allocation — balances that are included in the financial statements are appropriately valued and allocation adjustments are appropriately recorded.
- Presentation and disclosure
- Occurrence — the transactions and disclosures have actually occurred.
- Rights and Obligations — the transactions and disclosures pertain to the entity.
- Completeness — all disclosures have been included in the financial statements.
- Classification — financial statements are clear and appropriately presented.
- Accuracy and Valuation — information is disclosed at the appropriate amounts.
References[edit]
- ^ "Auditing Standard No. 3101.08". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
- ^ "Auditing Standard No. 1105.02". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
- ^ "AU Section 315" [PDF]. aicpa.org/. American Institute of Certified Public Accountants. Retrieved 15 July 2019.
- ^ a b "International Standards on Auditing sec. 315" [PDF]. ifac.org/. International Federation of Accountants. Retrieved 15 July 2019.
- ^ "Auditing Standard No. 1105.12". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
- ^ "Auditing Standard No. 1105.11". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
- ^ "Auditing Standard No. 15 [superseded]". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
- ^ "AU Section 326" [PDF]. aicpa.org. American Institute of Certified Public Accountants. Retrieved 25 September 2014.
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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 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.
- Transaction level assertions
- Account balance assertions
- Presentation and disclosure assertions
| [Used when examining journal entries and transactions] | [Used when examining asset, liability, and equity totals] | [Used to determine proper format and clarity] |
| Completeness, Accuracy, Classification, Occurrence, Cut-Off | Rights & Obligations, Existence, Completeness, Valuation | Accuracy, Occurrence, Completeness, Classification |
FAQs
An audit is the examination and evaluation of the financial statements of a company performed by an objective third party. The purpose of an audit is to make sure that the information contained in financial statements is fair and accurate and that a business is in compliance with all necessary rules. Publicly held companies are required to have an audit of their financial statements annually.
Yes. Audit assertions are also known as financial statement assertions or management assertions. Whatever term you use, the meaning is the same.
The word “audit” can make anyone’s blood run cold. If you’re entering your financial transactions properly, you don’t have anything to be worried about. However, understanding what auditors are looking for can help to ease your panic.
Auditors examine transactions made such as journal entries, financial statement balances, and the overall appearance, readability, and formatting of financial statements during an audit. Knowing this beforehand will help you be better prepared for the process.
Audits don’t have to be scary
Your financial statements are your promise or your assertion that everything contained in those statements is accurate. The job of an auditor is to test those assertions for accuracy. Unless you’re an auditor or CPA, you’ll never have to worry about testing audit assertions, and if you continue to enter financial transactions accurately, you won’t have much to worry about during the audit process.
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.