Audit assertions, also known as management assertions, are representations made by management regarding the accuracy and completeness of financial statements. These assertions are the implicit or explicit claims and assumptions made by management when presenting financial information. Auditors use these assertions as a framework to design and perform audit procedures, ensuring that financial statements provide a true and fair view of the organization’s financial position and performance.
Audit assertions can be categorized into three main groups: classes of transactions and events, account balances, and presentation and disclosure. Each category has specific assertions that auditors consider when planning and executing their audit procedures.
1. Assertions about Classes of Transactions and Events
These assertions relate to the transactions and events that occurred during the accounting period. The key assertions in this category include:
- Occurrence: Transactions and events that have been recorded actually took place and pertain to the entity. Auditors verify that recorded transactions are real and not fictitious.
- Completeness: All transactions and events that should have been recorded have been included in the financial statements. Auditors ensure that no relevant transactions are omitted.
- Accuracy: Amounts and other data relating to recorded transactions and events have been recorded appropriately. Auditors check the correctness of the numerical values and other details.
- Cutoff: Transactions and events have been recorded in the correct accounting period. Auditors examine whether transactions are recorded in the appropriate period, especially around the year-end.
- Classification: Transactions and events have been recorded in the proper accounts. Auditors ensure that transactions are classified correctly within the financial statements.
2. Assertions about Account Balances
These assertions pertain to the ending balances of accounts at the reporting date. The key assertions in this category include:
- Existence: Assets, liabilities, and equity interests exist at the reporting date. Auditors verify that the reported balances actually exist and are not overstated.
- Rights and Obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Auditors confirm that the entity has legal ownership or control over its assets and that liabilities are the entity’s obligations.
- Completeness: All assets, liabilities, and equity interests that should have been recorded are included in the financial statements. Auditors check that all relevant items are recorded and nothing is omitted.
- Valuation and Allocation: Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. Auditors ensure that items are valued correctly and that adjustments are properly accounted for.
3. Assertions about Presentation and Disclosure
These assertions relate to how information is presented and disclosed in the financial statements. The key assertions in this category include:
- Occurrence and Rights and Obligations: Disclosed events, transactions, and other matters have occurred and pertain to the entity. Auditors verify that the disclosed information is relevant and pertains to the entity.
- Completeness: All disclosures that should have been included in the financial statements have been included. Auditors ensure that all necessary disclosures are made and that no required information is omitted.
- Classification and Understandability: Financial information is appropriately presented and described, and disclosures are clearly expressed. Auditors check that the information is presented in a clear and understandable manner.
- Accuracy and Valuation: Financial and other information is disclosed fairly and at appropriate amounts. Auditors verify the accuracy of the disclosed information and ensure that it is properly valued.
By evaluating these assertions, auditors can design and perform appropriate audit procedures to gather sufficient and appropriate evidence. This helps them to form an opinion on whether the financial statements are free from material misstatements and whether they present a true and fair view of the entity’s financial position and performance. Audit assertions thus provide a structured approach for auditors to assess the reliability and integrity of financial statements.
