Audit Assertions In Financial Statement Audits

income statement assertions

The nature of related party transactions, balances and events has been clearly disclosed in the notes of financial statements. Disclosed events, transactions, balances and other financial matters have been classified appropriately and presented clearly in a manner that promotes the understandability of information contained in the financial statements. All transactions, balances, events and other matters that should have been disclosed have been disclosed in the financial statements.

  • A resulting benefit is that the auditor will have a better basis for determining the nature, timing and extent of further procedures and assessing potential fraud risks.
  • Each also provides the assertion meaning or definition to help one understand how each is used in an assessment.
  • Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs.
  • Confirming salaries and wages recorded during the current accounting period are related to the same period.

When management states the company ownership and the rights of usage of assets and the obligations associated with liabilities, the auditor must determine the ownership rights and obligations of the company. The purpose of an audit procedure determines whether it is a risk assessment procedure, test of controls, or substantive procedure. In summation, assertions are claims made by members of management regarding certain aspects of a business. Independent auditors use these representations as the foundation income statement assertions from which they design and perform procedures to test management’s assertions and form an opinion. A lot of work is required for your organization to support the assertions that your management team makes. And lastly, if you are a service organization you should be cognizant of the need to maintain a strong control environment to support your clients. Completeness Assertion – All assets, liabilities, and equity balances that were supposed to be recorded have been recognized in the financial statements.

Substantive Audit Procedures For Other Income:

Financial Statement Assertions are the claims that are made by the organization’s management pertaining to the financial statements. For example, an auditor may recalculate depreciation expenses and test asset purchase vouchers to ensure the proper valuation of asset balances. Accuracy, or valuation and allocationAccuracyValuation and allocationAmount related to transactions and events have been recorded appropriately.

income statement assertions

When preparing financial statements, a company or business’s management makes some claims. Auditors must verify these assertions to reach a conclusion regarding Certified Public Accountant a client’s financial statements. These assertions may differ according to whether the auditor is testing transactions and events or account balances.

For example, some auditors refer to a walk-through as a test of one that—if it is the only evidence gathered—is a minimal basis for any reliance. However, the assurance that can be placed on controls is a continuum based on the evidence that was gathered to support the assessment that controls are operating effectively. Auditing standards focus on the controls over financial reporting, but COSO’s 1992 Internal Control––Integrated Framework ( /publications/executive_summary_integrated_framework.htm ) also discusses regulation and operations. These other elements are relevant only if they affect financial reporting. For example, a failure to comply with regulatory requirements could affect contingencies or even the going concern assumption (see “ COSO Framework—The Five Components ”).

Similarly, it consists of the assertion that the entity has made any resulting valuation or allocation adjustments and appropriately recorded them. Furthermore, it includes any related disclosures and their measurement and descriptions. The classification assertion relates to how a company or client classifies the information in its financial statements.

Completeness may be determined by reviewing bank statements and other financial information to ensure that all deposits made during the reporting period have already been documented by managers in a timely manner. Auditors could also check for transactions in the banks that have not yet been registered by the bank’s records department. The public at large is obliged to hear assertions or declarations made by company leaders on certain areas of a company’s operations. Using these representations as a starting point, external auditors may develop and implement processes to verify the company’s assertions and establish a judgment, that they can then testify to the audience. For a company to be able to back up the claims made by its management team, a significant amount of effort must be put in. Sometimes, financial reporting rules extend further than the boundaries of the current corporation to include service companies that support the company’s activities. When management asserts that particular components of the financial statements are properly classified, described and disclosed, then the auditor must determine if they agree with management’s decisions.

What Are Classes Of Transactions?

In other words, if your small business is being audited, the auditor may ask for proof that the cash balance of your bank account belongs to the business. Auditors are required by ISAs to obtain sufficient & appropriate audit evidence in respect of all material financial statement assertions. The use of assertions therefore forms a critical element in the various stages of a financial statement audit as described below. 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. The assertion of accuracy and valuation is the statement that all figures presented in a financial statement are accurate and based on proper valuation of assets, liabilities and equity balances.

income statement assertions

The auditor should have a basis for his or her assessment of controls, such as a review of the design of controls over significant accounts and assertions, and a confirmation they are in operation by a walk-through or observation. The auditor cannot default to a high control-risk assumption without performing the required elements of a controls assessment. An important requirement in these standards is the need to link identified risks to relevant controls and to the audit actions designed to respond to these risks. Such a linkage helps the audit team determine whether the risks are addressed, assists in communication on the audit and helps reviewers, including peer reviewers, follow the implementation of the audit strategy. Because these standards address many issues at the core of auditing, they may significantly affect the formality of the risk assessment process and documentation of the assessment details, depending on how this has been done in the past.

What Does Audit Mean?

All the parties related to the company gain relevant information from these assertions and use them to their benefit. All the financial data shown in the financial statements have been reported properly and at their respective amounts, according to the claims. For instance, the current balance of trade receivables has been correctly stated in the financial statements. Because it must be assured that all necessary entries have been correctly measured and officially recorded, accuracy regarding various bookkeeping accounting principles is, therefore, a crucial requirement. This assertion is also utilized to determine whether the transactions that are recorded in the financial statements are connected to the entity in question. Examples include manufacturing costs incurred because of items built in the firm’s manufacturing department, which are recorded as a cost of goods sold in the financial accounts. This refers to the fact that the real number of transactions is completely documented and error-free.

Substantive testing for the assertion of existence frequently involves some type of confirmation with an outside third party. For example, a long-standing auditing procedure to be used where practicable is the confirmation of receivables. The auditor should exercise due care to determine the legitimacy of the address of the person to whom receivable confirmation is being sent. What makes this assertion particularly interesting is that it is the concluding opinion in the financial statement of a client of the Arthur Andersen Company, at the time one of the “big eight” U.S. accounting firms. Each of these three major components has numerous smaller components that further describe the company’s financial health. Inevitably, as details are given, many of them require more explanation. And, in general, the readers of the statement need to know how the given data was arrived at and by whom.

income statement assertions

Examples include material costs that are recorded in the financial statements and that are related to a particular accounting period. Alternatively, the activities are accurate during the period in which they happened. It essentially guarantees that the transactions reflected in the Financial Statements comprise of transactions that are solely related to the present financial year, as opposed to activities that are not. For instance, the HR department’s charges only contain those expenses that are related to the present fiscal year. Costs that have been spent in past years are not included in the present year’s salary expenditure. SOX also created the Public Company Accounting Oversight Board —an organization intended to assess the work performed by public accounting firms to independently assess and opine on management’s assertions.

Types Of Statements In Accounting

Any inventory held by a third party on behalf of the audit entity has been included in the inventory balance. The assertion of completeness also states that a company’s entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. 13) In conjunction with other controls, this control is used to ensure that transactions posted occurred , were complete and measured . Correspondingly, for the balance sheet accounts, the Existence Completeness and Valuation assertions are addressed. Testing for completeness means checking that the company records show all the accounts payable and state the amounts owed accurately; understating or omitting the amounts owed will distort the balance sheet and make a company look more profitable than it is. Consider whether the audit has addressed all of the relevant assertions for all important accounts and transaction streams.

The assertion is that recorded business transactions actually took place. The assertion is that the full amounts of all transactions were recorded, without error. 9) Again this control would assist in ensuring that the inventory purchased, and corresponding liability, are carried at the correct value . 6) This control is typically used to ensure the genuineness of purchases. It could also apply to the objective of ensuring that expenses are real . There are six specific steps in the audit process that should be followed to ensure a successful audit. Substantive Analytical Procedures include the consideration of whether any specific circumstances are arising that could result in the generation of Other Income.

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When Management states that all items on the financial statement are appropriately valued, then the auditor has to determine if any items and events that happened in the fiscal year were not appropriately valued and allocated to the appropriate period. Presentation and disclosure – The components of the financial statements are properly classified, described, and disclosed.

Some people may refer to these as audit assertions as they are evaluated during an audit of an entity’s financial statements. Auditors will employ a wide variety of procedures to test a company’s financial statements with respect to each of these assertions. So the “assertion level” is the level at which statements are presented as completely true.

Check whether the presentation is appropriate as required by the applicable financial reporting framework. Valuation assertion says that the value should be as per the relevant accounting framework. Few accounting standards also requires provision in case of unrealised loss. Thus, auditor needs to ensure that the value appearing on the face the balance sheet is appropriate. Accounts 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. The validity of statistics presented in the financial statements as well as the appropriateness of information disclosed in those financial statements is ensured by audit assertions.

Phasing in the development of efficient documentation today, prior to the effective date of the standards, can save audit time and expense (see “ Control Objective Based Documentation, ” below). Evidence that a control has been implemented can be obtained in a walk-through that follows transactions from their inception through the aggregation process in the ledger. While not intended as a checklist of all factors, appendix C to SAS no. 109 provides specific examples of risks for consideration. This list, plus other factors identified in the standards, may facilitate productive discussions during the brainstorming session. These factors have roots in business risks that in the past have led to audit issues. Due to the possible aggregating effects of immaterial misstatements and the need to opine at a low risk, auditors should design procedures at the account- or stream-of-transactions level, using a test threshold that is lower than the overall materiality level.


Checking completeness of a financial statement is to analyze whether all the transactions that are already given in the financial statement are correctly included. To test these items of the financial statement, it is hot sufficient that only books are consulted which record the assets or the liabilities.

Comparing inventory levels to sales data to confirm all inventory is properly recorded at period end. Verifying special exceptions applied to various classes of transactions (e.g., capitalization of research costs related to developing patents) are recorded properly. As far as Rights and Obligations are concerned, recording transactions this assertion is made by the management in order to validate that the entity has the right of ownership or the use of the given assets. Basically, it ensures that the represented transactions in the Financial Statements include transactions that are only relevant to the current financial year.

In the United States, the Financial Accounting Standards Board establishes the accounting standards 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 . The assertion is that all asset, liability, and equity balances have been recorded at their proper valuations. The assertion is that all reported asset, liability, and equity balances have been fully reported. The assertion is that all transactions were recorded within the correct reporting period.

In this scheme the payables clerk adds and makes payments to a nonexistent vendor. Those fraudulent payments appear as expenses in the income statement.

Kenes Rakishev