Audit Assertions: Meaning, Key Types and Practical Examples

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. For example, existence, rights, and cutoff might be relevant to cash, but not valuation or understandability. Auditors who examine a company’s financial records verify that transactions, balances, and disclosures satisfy specific criteria. These criteria, called assertions, allow the auditor to form a judgment about the financial reporting by the company. In that case, it means they feel sure that all transactions have been recorded correctly and that there are no hidden liabilities or overstated assets.

Completeness – this means that transactions that should have been recorded and disclosed have not been omitted. The above procedure is also known as “three-way matching” which refers to the matching of three supporting documents, including invoice, purchase order and receiving report. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. Also, it is important that auditors use audit sampling in a way that all sampling units in the population have a chance of being selected.

Account balances include all the asset, liabilities and equity interests included in the statement of financial position at the period end. Since these claims and characteristics need to be tested, it is important to have a clear understanding of these assertions. These are assertions are characteristics that need to be tested in order to ensure that financial records and disclosures are correct and appropriately mentioned.

Overvaluing assets like inventory or receivables can inflate a company’s balance sheet, giving a misleading impression of its financial strength. This can have serious implications, especially if the company seeks financing based on these inflated figures. Creditors might extend loans based on inaccurate information, increasing the risk of default if the company’s true financial condition is weaker than presented.

This assertion addresses the risk of understatement, where certain liabilities or expenses might be omitted. Auditors test this assertion by performing procedures such as tracing transactions from source documents to the financial records, reviewing subsequent events, and examining cut-off procedures. For instance, they might trace a sample of purchase orders to the general ledger to verify that all purchases have been recorded. By confirming the completeness of financial records, auditors help ensure that the financial statements provide a full and accurate representation of the company’s financial activities. Detection risk is the chance that an auditor will fail to find material misstatements that exist in an entity’s financial statements. External auditors follow a set of standards different from that of the company or organization hiring them to do the work.

For instance, an overstatement of revenue can paint an overly optimistic picture of a company’s performance, potentially inflating its stock price and misleading investors.
The effectiveness of an audit hinges on accurately testing these assertions to detect any material misstatements that could mislead stakeholders.
By understanding and applying the concept of assertions, finance professionals can contribute to accurate financial reporting and decision-making.
Audit assertions form to be the basis of the entire audit planning and procedural phase.

Assertions About Presentation and Disclosure

If the internal controls are deemed effective, auditors may reduce the extent of substantive testing required, as the risk of material misstatement is lower. They involve procedures usually used by the auditors to test a company’s guidelines, policies, internal controls, and financial reporting processes. These assertions are the explicit or implicit representations and claims made by the management of a company during the preparation of their company’s financial statements. Financial statement assertions are fundamental to the integrity and reliability of financial reporting. From an auditor’s perspective, they have to be entirely sure that all line items in the financial statements have sufficient compliance with these assertions. The main premise is that for each line in the financial statements, the auditors’ primary objective is to ensure that there are no material misstatements in the given assertions.

Inspection of records or documents

They help auditors identify the areas that require closer scrutiny and determine the nature, timing, and extent of the audit tests to be performed. For instance, if management asserts that all transactions have been recorded, the auditor will design procedures to verify the completeness of the financial records. This targeted approach not only enhances the efficiency of the audit but also increases the likelihood of detecting any discrepancies or misstatements. Management tells the auditor the financial statements show a true valuation of inventory – management are formally “asserting” this statement as being correct, so we call this at the “assertion level”.

Management assertions in auditing

Artificial intelligence (AI) and machine learning are also making their mark on the audit profession. These technologies can automate routine tasks, such as data entry and reconciliation, freeing up auditors to focus on more complex and judgmental areas of the audit. AI can also enhance risk assessment procedures by analyzing historical data to predict areas of potential misstatement. For example, machine learning algorithms can identify patterns in past audit findings, helping auditors to pinpoint high-risk areas that require closer scrutiny. This not only improves the efficiency of the audit but also increases the likelihood of detecting material misstatements. Audit reports are required by law if a company is publicly traded or in an industry regulated by the Securities and Exchange Commission (SEC).

The existence assertion verifies that the assets, liabilities, and equity interests reported in the financial statements actually exist at a given date. This is particularly important for assets like inventory, accounts receivable, and fixed assets, where the risk of overstatement can be significant. Auditors typically use procedures such as physical inspections, confirmations, and reconciliations to test this assertion.

Types of Audits

Assertions play a foundational role in the audit process, serving as the benchmarks against which auditors measure the accuracy and reliability of financial statements. By evaluating these assertions, auditors can determine whether the financial records present a true and fair view of the company’s financial health. This process involves a meticulous examination of various elements within the financial statements, ensuring that each component adheres to the established criteria. Assertions are characteristics that need to be tested to ensure that financial records and disclosures are correct and appropriate.

The auditor’s report contains the auditor’s opinion on whether a company’s financial statements comply with accounting standards.
Inquiry is another essential technique, involving direct communication with management, employees, and other stakeholders.
Another significant challenge is the inherent subjectivity in certain financial estimates and judgments.
This assertion becomes highly critical in audit assertions for accounts payable; for instance, a company might attempt to understate liabilities to show a healthier financial position.
The Sarbanes-Oxley Act (or SOX Act) is a U.S. federal law that aims to protect investors by making corporate disclosures more reliable and accurate.

For example, they might physically count inventory items or confirm account balances with external parties. Ensuring the existence of reported items helps prevent the inclusion of fictitious assets or understated liabilities, thereby providing a more accurate picture of the company’s financial position. The auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.

The biggest difference between an internal and external audit is the concept of independence of the external auditor. Substantive procedures (or substantive tests) are those activities what are the 7 audit assertions performed by the auditor to detect material misstatement or fraud at the assertion level. The assertion that all the transactions and events recorded in the financial statements, have occurred and are related to the entity is called occurrence.

Identifying Risks

With its decentralized and immutable ledger, blockchain offers a transparent and tamper-proof record of transactions. Auditors can leverage blockchain to verify the existence and accuracy of transactions without relying solely on traditional documentation. This technology can streamline the audit process, reduce the risk of fraud, and provide real-time verification of financial data.