When preparing financial statements, a business’s or company’s management makes various claims. These claims come in the form of financial statement assertions. Financial statement assertions include a set of claims that are crucial for the preparation of financial statements. These assertions apply to the balance sheet and income statement, both of which are critical financial statements.
During the audit process, auditors test all assertions made by the client’s management. Some assertions may apply to some items but not to others. Based on these tests, auditors can conclude whether the financial statements are free from material misstatement. Auditors can categorize financial statement assertions into assertions relating to transactions and events, and account balances.
What are the Assertions in the Audit of Financial Statements?
In the audit of financial statements, there are two main types of assertions; assertions related to transactions and events as well as assertions related to account balances. There are six assertions that relate to transactions and events and six assertions associated with account balances. For transactions and events, auditors need to verify the occurrence, completeness, accuracy, cut-off, classification, and presentation assertions. For account balances, auditors need to check the existence, rights and obligations, completeness, accuracy, valuation and allocation, classification, and presentation assertions.
A description of each of these assertions is as below.
Occurrence
The occurrence assertion relates to whether a transaction or event recorded and disclosed actually occurred. Auditors need to verify whether transactions reported in the financial statements are legit and have evidence to support their occurrence. Auditors also need to ensure that these transactions pertain to the reporting entity.
For example, auditors must ensure that all movements relating to inventory are authorized and recorded. For sale transactions, auditors need to verify whether actual customers ordered them and the goods were dispatched and invoiced.
Completeness
Auditors also need to ensure that all transactions and events or account balances that should have been recorded have actually been recorded. Similarly, auditors need to ascertain the client has included all related disclosures in the financial statements where applicable. With completeness, auditors test whether the client has reported all the information properly.
For example, auditors may pick a sample of invoices and trace them to their posting in the ledgers.
Accuracy
Accuracy involves ensuring whether amounts and other data have been recorded appropriately in the financial statements. It also involves checking for the related disclosures. When testing the accuracy assertion, auditors need to ensure that the client has presented all the information accurately. It may include recalculations or reperformances.
For example, an auditor may reperform calculations on invoices to ensure whether they are accurate.
Cut-off
The cut-off assertion relates to whether a company has presented information in the correct accounting period. This assertion usually applies to any transactions and events that occur close to the year-end.
For example, auditors may check whether the client has recorded the last few invoices in the year in the current period.
Classification
The classification assertion relates to how a company or client classifies the information in its financial statements. It includes the claim that the reporting entity has recorded transactions and events or account balances in the proper accounts.
For example, auditors may check to ensure that the client hasn’t posted purchases to salaries and wages accounts.
Presentation
The presentation assertion is that all transactions and events, and account balances are aggregated or disaggregated appropriately and clearly described. It also includes presenting the related disclosures in a way that is relevant and understandable in the applicable financial reporting framework’s context.
For example, auditors may check whether the client has provided relevant information regarding employee benefit expenses disclosed in the financial statements.
Existence
The existence assertion is that any assets and liabilities recorded in the financial statements actually exist. Similarly, it includes a claim that there is no overstatement in reporting these items. For assets, it usually comprises testing the physical existence. For liabilities, auditors need to confirm from the related parties.
For example, auditors may physically inspect an asset to verify its existence.
Rights and obligations
The rights and obligation assertion implies that the reporting entity has the legal title or controls the rights to use an asset. For liabilities, it means that the reporting entity has an obligation to repay. Both of these relate to the fundamental definition of assets and liabilities.
For example, an auditor may check the deeds for the assets recorded in the financial statements.
Accuracy, valuation and allocation
The accuracy, valuation, and allocation assertion imply that the reporting entity has included all account balances at the appropriate amounts in the financial statements. Similarly, it consists of the assertion that the entity has made any resulting valuation or allocation adjustments and appropriately recorded them. Furthermore, it includes any related disclosures and their measurement and descriptions.
For example, an auditor may recalculate depreciation expenses and test asset purchase vouchers to ensure the proper valuation of asset balances.
Conclusion
When preparing financial statements, a company or business’s management makes some claims. These are known as financial assertions. Auditors must verify these assertions to reach a conclusion regarding a client’s financial statements. These assertions may differ according to whether the auditor is testing transactions and events or account balances.
