What are Audit Assertions?
Audit assertions are the inherent claims made by the management of the company with respect to the recognition and presentation of the different elements of the financial statements of the company which are used for the audit of those financial statements.
They involve procedures usually used by the auditors to test a company’s guidelines, policies, internal controls, and financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. processes. These assertions are the explicit or implicit representations and claims made by the management of a company during the preparation of financial statements of their company.
The audit assertions are primarily regarding the correctness of the different elements of the financial statements and the disclosures of a company. Audit Assertions also referred to as Financial Statement Assertions and Management Assertions.
Different Categories of Assertions
Audit assertions can be broadly listed into three general categories which are listed below:
- Account Balances – These assertions are generally pertaining to the end of period balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. accounts such as assets, liabilities, and equity balances.
- Classes of Transactions – Income statement accounts usually use these assertions.
- Presentation and Disclosure – These assertions deal with the presentation and disclosure of different accounts in the financial statements.
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List of Audit Assertions Related to Account Balances
#1 – Existence
It refers to the fact that the assets, the liabilities, and the equity balances mentioned in the books exist at the end of the accounting period. This assertion is critical for the asset accountsAsset AccountsAsset Accounts are one of the categories in the General Ledger Accounts holding all the credit & debit details of a Company’s assets. The examples include Short-Term Investments, Prepaid Expenses, Supplies, Land, equipment, furniture & fixtures etc. because it is a reflection of the strength of the company.
#2 – Completeness
It refers to the fact that the assets, liabilities, and equity balances, which needed to be recognized, have been recorded in financial statements. You need to note that leaving out any of the aspects of an account can lead to the wrong representation of the financial health of the company.
#3 – Rights & Obligations
It pertains to the confirmation that the entity has the right to ownership of the assets and obligations for the liabilities recorded in the financial statements.
#4 – Valuation
This type of assertion is related to the proper valuation of the assets, the liabilities, and the equity balances. Valuation of the balance sheet items must be correct as overvalued or undervalued accounts will result in the wrong representation of the financial facts. You must perform the valuation properly to reflect an accurate and fair position of the financial position of the company.
List of Audit Assertions Related to Classes of Transactions
#1 – Occurrence
It refers to the fact that all the transactions recorded in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. have occurred and are related to the stated entity.
#2 – Completeness
It is about the fact that all the transactions which were supposed to be recognized have been recorded in the financial statements entirely and comprehensively.
#3 – Accuracy
It refers to the fact that all the transactions have been recognized accurately at their correct amounts. For instance, any adjustments required have been correctly reconciled and accounted for in the statements.
#4 – Cut-off
It refers to the fact that all the transactions have been recorded in the appropriate accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.. Transactions like prepaid and accrued expensesAccrued ExpensesAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited. have to be recognized correctly in the financial statements.
#5 – Classification
This type of assertion is to confirm that all the transactions have been classified and presented properly in the financial statements.
List of Audit Assertions Related to Presentation and Disclosure
#1 – Occurrence
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.
#2 – Completeness
It is about all transactions, events, balances, and other matters that should be disclosed in the financial statements and confirms their appropriate disclosure.
#3 – Classification & Understandability
This type is related to the comprehensiveness of the disclosed events, balances, transactions, and other financial matters. It confirms that all have been classified correctly and presented clearly in such a manner that helps in the understanding of the information contained in the financial statements.
#4 – Accuracy & Valuation
This assertion confirms that the transactions, balances, events, and other similar financial matters have been correctly disclosed at their appropriate amounts.
Relevance and Uses of Audit Assertions
The understanding of the audit assertions is very important from an investor’s viewpoint because almost every financial metric used to evaluate a company’s stock verifies through these assertions. The audit assertions carry out to verify the financial figures computed using data from the company’s financial statements. If in case the figures are inaccurate, then that would result in a misrepresentation of the financial metrics, which includes the price-to-book value ratioPrice-to-book Value RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share (P/B) or earnings per share (EPS)(EPS)Earnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is..
These are a few of the financial metrics which are being commonly used by analysts and investors to evaluate the company stocks. During the process of an audit of a company’s financial statements, the main idea of an auditor is to check and confirm the reliability of the facts and the figures recognized in the financial statements and capture the facts truly and fairly in the audit assertions.
This article has been a guide to what is Audit Assertions and its definition. Here we discuss the list of audit assertions along with its categories (Account balances, classes of transactions, presentation, and disclosure). You may learn more about our articles below on accounting –