This blog is written by Mr. Waheed Ahmed, Associate, Audit and Assurance Services. Please read this blog and provide your comments.

Management Assertions and Audit Procedures

Management is responsible for the fair presentation of financial statements that reflect the nature and operations of the entity. In representing that the financial statements are fairly presented in conformity with generally accepted accounting principles, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.

Assertions used by the auditor could be classified into the following categories :

1. Assertions about classes of transactions and events for the period under audit:

  • Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.
  • Completeness. All transactions and events that should have been recorded have been recorded.
  • Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately.
  • Cutoff. Transactions and events have been recorded in the correct accounting period.
  • Classification. Transactions and events have been recorded in the proper accounts.

2. Assertions about account balances at the period end:

  • Existence. Assets, liabilities, and equity interests exist.
  • Rights and obligations. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
  • Completeness. All assets, liabilities, and equity interests that should have been recorded have been recorded.
  • 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.

3. Assertions about presentation and disclosure:

  • Occurrence and rights and obligations. Disclosed events and transactions have occurred and pertain to the entity.
  • Completeness. All disclosures that should have been included in the financial statements have been included.
  • Classification and understandability. Financial information is appropriately presented and described and disclosures are clearly expressed.
  • Accuracy and valuation. Financial and other information are disclosed fairly and at appropriate amounts.

The auditor should use relevant assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. The auditor should use relevant assertions in assessing risks by considering the different types of potential misstatements that may occur, and then designing further audit procedures that are responsive to the assessed risks.

Relevant assertions are assertions that have a meaningful bearing on whether the account is fairly stated.

Additionally, the auditor might, in some circumstances, focus on the presentation and disclosure assertion separately in connection with the period-end financial reporting process.

For each significant class of transactions, account balance, and presentation and disclosure, the auditor should determine the relevance of each of the financial statement assertions.

To identify relevant assertions, the auditor should determine the source of likely potential misstatements in each significant class of transactions, account balance, and presentation and disclosure. In determining whether a particular assertion is relevant to a significant account balance or disclosure, the auditor should evaluate:

  1. The nature of the assertion;
  2. The volume of transactions or data related to the assertion; and
  3. The nature and complexity of the systems, including the use of information technology, by which the entity processes and controls information supporting the assertion.

For the auditors, obtaining an assurance above these assertions involve a combination of audit procedures used to obtain audit evidence during the conduct of financial audits. These include:

  • Physical examination (inspection
  • Observation
  • Documentation
  • Inquiry
  • External confirmation
  • Recalculation
  • Re performance
  • Analytical procedures

Waheed Ahmed