What Are the Audit Assertions? Definition, Types, And Explanation

Cut-off has special significance when reviewing payroll and inventory levels. For example, any statement of inventory included in the financial statement carries the implicit assertion that such inventory exists, as stated, at the end of the accounting period. The assertion of existence applies to all assets or liabilities included in a financial statement. They are the official statement that the figures reported are a truthful presentation of the company’s assets and liabilities following the applicable standards for recognition and measurement of such figures. Inspection of tangible assets is the process of physical examination of the company’s tangible assets such as property, plant and equipment.

Candidates must be able to link relevant procedures to the specific assertion required. In this instance, for example procedures performed at the inventory count which provide evidence of existence and completeness of inventory would not be relevant. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the VALUATION of X Co’s inventory.

Risks at the Financial Statement Level

The risk assessment for valuation, existence, rights and obligations, completeness, and all other assertions are high. Logically, the substantive procedures must now address all of these (high) risks. Relevant tests – auditors often use disclosure checklists to ensure that financial statement presentation complies with accounting standards and relevant legislation. These cover all items (transactions, assets, liabilities and equity interests) and would include for example confirming that disclosures relating to non–current assets include cost, additions, disposals, depreciation, etc. The preparation of financial statements is the responsibility of the client’s management. Hence, the financial statements contain management’s assertions about the transactions, events and account balances and related disclosures that are required by the applicable accounting standards such as US GAAP or IFRS.

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. For that, auditors may use various tests and audit procedures to ascertain the completeness of those assets. An external audit is a process where independent auditors examine a company’s financial statements. Based on their examination, they conclude whether those statements are free from material misstatements. However, it is crucial to understand what audit assertions are first.

What is Auditing? – Overview, Types, Opinions, Processes, And More

Inherent risk is assessed at high for completeness (client has not fully recorded payables in prior years). The claims which indicate the true and fair representation of the financial statements are called assertions. All related parties, related party transactions and balances that should have been disclosed have been disclosed in the notes of financial statements. Entity has the right to ownership or use of the recognized assets, and the liabilities recognized in the financial statements represent the obligations of the entity.

• 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.
• Hence, the financial statements contain management’s assertions about the transactions, events and account balances and related disclosures that are required by the applicable accounting standards such as US GAAP or IFRS.
• If you want to test out the authenticity of this assertion, you can review legal documents, such as deeds, and borrowing agreements for loans and other debts.
• These procedures include analytical procedures, substantive analytical procedures, and tests of details.
• Relevant tests – in the case of property, deeds of title can be reviewed.

Any accrued and prepaid expenses have been accounted for correctly in the financial statements. Presentation – this means that the descriptions and disclosures of transactions are relevant and easy to understand. There is a reference to transactions being appropriately auditing assertions list aggregated or disaggregated. Disaggregation is the separation of an item, or an aggregated group of items, into component parts. The notes to the financial statements are often used to disaggregate totals shown in the statement of profit or loss.