MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES STUDY OBJECTIVE 5 Accounting Information Systems: The Processes and Controls, 2nd Edition Book


It can be for other items as well.Do a physical count of the assets, and ensure assets on the floor have been recorded in the ledger/business record.Understatement of the assets.In the given example, we have discussed two assertions for the audit. Let’s discuss different types of audit/management assertions. As you consider the significant account balances, transaction areas, and disclosures, specify the relevant assertions. So you can determine the risk of material misstatement for each and create responses.

Cut-off Assertion – Transactions have been recognized in the correct accounting periods. 1AS 2810,Evaluating Audit Results,establishes requirements regarding evaluating whether sufficient appropriate evidence has been obtained. AS 1215,Audit Documentation,establishes requirements regarding documenting the procedures performed, evidence obtained, and conclusions reached in an audit. Substantive procedures, including tests of details and substantive analytical procedures. To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor’s opinion is based.

  • The assertion is that recorded business transactions actually took place.
  • Some auditors believe that the only controls they need to consider are control activities, like performing bank reconciliations.
  • The auditor uses these four phases as a guideline during the audit process when they have a new client and do not have prior experience on the client to determine the important parts of the company that need to be audited.
  • If the client performs this control either monthly or yearly, we can perform the test of control for accounts payable here by examining and evaluating the client’s procedures of performing these reconciliations.

Below is a summary of the assertions, a practical application of how the assertions are applied and some example audit procedures relevant to each. Classification – assets, liabilities and equity interests have been recorded in the proper accounts. Classification – transactions and events have been recorded in the proper accounts. You also have to make sure that disclosures — any additional information needed to explain the numbers on the financial statements — are provided. You may be wondering if financial statement level risk can affect assertion level assessments.

What are audit assertions?

Long term liabilities such as loans can be agreed to the relevant loan agreement. Rights and obligations–means that the entity has a legal title or controls the rights to an asset or has an obligation to repay a liability. 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. Accuracy– this means that there have been no errors while preparing documents or in posting transactions to ledgers. The reference to disclosures being appropriatelymeasured and describedmeans that the figures and explanations are not misstated.

  • Presentation–this means that the descriptions and disclosures of assets and liabilities are relevant and easy to understand.
  • Disaggregation is the separation of an item, or an aggregated group of items, into component parts.
  • This is the assertion that all appropriate information and disclosures are included in a company’s statements and all the information presented in the statements is fair and easy to understand.
  • We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
  • It means the auditor should perform substantive procedures to respond to the high-risk assessments for each assertion.

Account Balance Assertions are utilized to evaluate the balances of assets and liabilities, as well as the sums of equity. These claims are subdivided into the four categories listed below. When evaluating transactions and journal entries, Transaction-Level Assertions are employed to ensure that the data is correct. There are five assertions included in this category, as mentioned below. In order to test completeness, the procedure should start from the underlying documents and check to the entries in the relevant ledger to ensure none have been missed.

Audits don’t have to be scary

The auditor is tasked with authenticating the accounts receivable balance as reported through a variety of means, including choosing a particular accounts receivable customer and examining all related activity for that particular customer. A service organization can greatly reduce the number of resources expended to meet user auditors’ requests by having a Type II SOC 1 audit performed. Completeness Assertion – All transactions that were supposed to be recorded have been recognized in the financial statements. Sufficient and appropriate disclosures have been made on related transactions, events and account balances. Account balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity. Assertions are claims that establish whether or not financial statements are true and fairly represented in the process of auditing.

The of a company should not be terrified or feel unpleasant by the regular audits of the company’s data. It must take the opportunity to get acquainted with the many kinds of audit assertions as well as how the analysis methods used to verify them contribute to the establishment of the honest presentation of a company’s financial status and performance. As a result, the management will be well-prepared to confront the analytical procedures with financial data that is accurate, full, and reliable if it follows these steps. Participants will also have a comprehensive knowledge of what is going on, and the staff will have valuable and reliable information on which they can count for successful financial analysis and policymaking in the future. This shows that forming the assertions is not only beneficial for the auditors, but also for the management and employees of the company. All the parties related to the company gain relevant information from these assertions and use them to their benefit.

sufficient appropriate audit

It is about all transactions, events, balances, and other matters that should be disclosed in the financial statements and confirms their appropriate disclosure. A violation of the existence objective occurs when auditing the accounts receivable balance is a failure to include a​ customer’s account receivable balance which will lead to an understatement of the accounts receivable balance. A violation of the completeness objective when auditing the accounts receivable balance occurs when fictitious amounts from a customer are posted to the​ account, leading to an overstatement. A violation of the existence objective when auditing the accounts receivable balance occurs when the account receivable lists fictitious amounts from a customer and are posted to the​ account, leading to an overstatement. An audit is the examination and evaluation of the financial statements of a company performed by an objective third party.

Relevance and Uses of Audit Assertions

It confirms that all have been classified correctly and presented clearly in such a manner that helps understand the information contained in the financial statements. ​ Assertions about account balances at period​ end; Assertions about existence or​ occurrence; Assertions about presentation and disclosure. Management assertions are the implied representations agreed upon by the auditors or management about the completeness of the financial statements. There are numerous audit assertion categories that auditors use to support and verify the information found in a company’s financial statements.


In order to verify the management claims/assertions, the auditors need to design and perform audit procedures. Thus, as auditors, we have responsibilities to perform suitable auditing procedures in order to provide the evidence necessary to persuade that there is no material misstatement related to each of the relevant assertions in the financial statements. Assertions are characteristics that need to be tested to ensure that financial records and disclosures are correct and appropriate. If assertions are all met for relevant transactions or balances, financial statements are appropriately recorded.

Obtaining more of the same type of audit evidence, however, cannot compensate for the poor quality of that evidence. Disclosed events and transactions have occurred and pertain to the entity. Transactions and events have been recorded in the proper accounts.

For example, if a balance sheet indicates inventory on hand for $10,000, it is the job of the auditor to verify its existence. For chartered accountants as well as other auditors to determine the validity of these statements, they must examine and evaluate several different parts of the financial data and reports. Look at two or three of your audit files and review your risk assessments.

Occurrence– this means that the transactions recorded or disclosed actually happened and relate to the entity. For example, that a recorded sale represents goods which were ordered by valid customers and were despatched and invoiced in the period. An alternative way of putting this is that sales are genuine and are not overstated. To communicate with your audit peers and supervisors, you must know key auditing phrases. Knowing these buzzwords is also helpful if you’re a business owner, because auditors sometimes forget to switch from audit-geek talk to regular language when speaking with you. In other words, they might use assertions different from those listed above, or the auditor could list each assertion separately.

Auditors may look at other assets as well to determine whether they are the property of the business or are just being used by the business. Liabilities are another area that auditors will review to determine that any bills paid from the business belong to the business and not the owner. Inventory is another area that auditors may review to determine that inventory is properly valued and recorded using the appropriate valuation methods. Occurrence Assertion – Transactions recognized in the financial statements have occurred and relate to the entity.

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This assertion may also be categorized as an understandability assertion. The Financial Accounting Standards Board establishes accounting standards in the United States. These are regulations that companies must follow when preparing their financial statements. The FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles . It refers to the presentation of all the transactions and the disclosure of all the events in the financial statements and confirms that they have occurred and are related to the entity.

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how to calculate sales tax payable is not complex and there are no new accounting standards related to it. The company suffered a fictitious vendor fraud during the year, so the occurrence assertion has uncertainty. Volume is moderate and directional risk is an understatement. Inherent risk is assessed at high for occurrence and completeness. Audit Assertions are the implicit or explicit claims and representations made by the management responsible for the preparation of financial statements regarding the appropriateness of the various elements of financial statements and disclosures.

While assertions are made in all aspects of life, in an accounting or business setting, most people think of a company’s financial statements, or the audit of the financial statements, when they think of assertions. These representations are commonly referred to as Audit Assertions, Management Assertions, and Financial Statement Assertions. Suppose the auditor assesses risk at the transaction level, assessing all accounts payable assertions at high.

accounting standards

They assure that the assets, equity, and liabilities are recorded in the correct amounts and are fair. This shows that the three categories have similar assertions but are related to separate aspects of the financial statements of the company. These assertions are all equally important for the auditors to examine the compliance of the statements with the accounting regulations. The preparation of financial statements is the responsibility of the client’s management. Likewise, we usually use these assertions to assess external financial reporting risks. Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements is making to its users.

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