Relevant Assertions in Financial Statement Audits

These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. The audit assertions can provide us the clues on the potential misstatements that might occur on financial statements. Likewise, we usually use these assertions to assess external financial reporting risks. The main objective of an accounts receivable audit is to determine whether there are adequate controls and procedures to ensure the proper recording of accounts receivable.

Presentation and Disclosure Assertions

At the end of this article, you can also see the summary of all assertions and their usages. Current assets are often agreed to purchase invoices although these are primarily used to confirm cost. Long Bookkeeping vs. Accounting term liabilities such as loans can be agreed to the relevant loan agreement. Classification – that transactions are recorded in the appropriate accounts – for example, the purchase of raw materials has not been posted to repairs and maintenance. Relevant test – reperformance of calculations on invoices, payroll, etc, and the review of control account reconciliations are designed to provide assurance about accuracy.

What are internal controls on financial reporting?

• Relevant tests – auditors often use disclosure checklists to ensure that financial statement presentation complies with accounting standards and relevant legislation.
• Similar to the allowance for doubtful account, the assessment of bad-debt write-offs is to ensure the correct valuation and allocation as well as the presentation and disclosure.
• When performing an audit, it is the auditor’s job to obtain the necessary evidence to verify the assertions made in the financial statements.
• The following lists the types of audit assertions in the three areas of a financial audit.
• The concern in the audit of accounts receivable is usually on the factoring of the receivables in which the client should no longer have the right of control to receivables.
• These assertions are significant for auditors since they form a basis to ascertain whether the financial statements represent the actual financial condition of the company.

As mention above, completeness assertion is the most relevant assertion in the audit of accounts payable; hence we usually assess the importance of internal control concerning the completeness of accounts payable. In this case, the main control for accounts payable that we want to check with the client is the reconciliation of the account payable balances with supplier statements. This type of internal control can help to ensure the completeness of accounts payable. We test the accuracy assertion to verify whether expense transactions recorded are mathematically correct. As mentioned above, we usually test accuracy together with occurrence assertion for the expenses. Substantive audit procedures include substantive analytical procedures and tests of details.

Substantive Procedures

In this section, we will cover various substantive audit procedures for inventory for each type of assertion that we mentioned in the above section. This assertion guarantees that financial statements contain all such disclosures which are necessary. For example, Auditors confirm that finical reports contain pending litigations.

Why Accuracy and Valuation Matter?

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. Tracing also plays a vital role in testing the QuickBooks completeness and, sometimes, accuracy assertions of the financial statements.

• The auditor should select a sample of invoices from the accounts receivables aging report and test the supporting documents of those invoices.
• In assessing the risk of fraud related to the cash, we need to consider how high the level of client’s business, control and policy related to incentives, opportunities to commit fraud, and rationalization.
• In the same manner, the part of the obligation also validates that the organization accepts that it is supposed to abide by the obligations and accept them as its liabilities.
• If there is a big difference between the actual figures and the budgeted figures, we need to enquire management about the reasons behind.
• 11AS 2305, Substantive Analytical Procedures, establishes requirements on performing analytical procedures as substantive procedures.
• This indicates that all transactions that are required to be declared in the financial statements have also been revealed in their entirety.

Tracing Objectives

• For tracing, auditors don’t consider the total value of a transaction or a line item on the financial statements.
• It helps them to understand the relationship between financial and non-financial data.
• Here are a few key objectives of vouching technique in an auditing process.
• Accuracy – this means that there have been no errors while preparing documents or in posting transactions to ledgers.
• Let us consider the situation of Techvilla, an imaginary city in Loolaland where Jasmin works as chief financial officer at Innovabest Solutions Ltd.

This type of audit procedures is usually done through formal written letters. Auditors usually perform the confirmation procedure for testing account balances such as accounts receivable, accounts payable, and bank balances, etc. Audit assertions offer a clear framework management assertions to verify whether the accounts are accurate and reliable.