Management Assertions in Auditing

Frameworks like the Committee of Sponsoring Organizations (COSO) are often used to evaluate and address risks related to internal controls. These Coffee Shop Accounting are a few of the financial metrics which analysts and investors commonly use to evaluate the company stocks. Management assertions, in the context of an audit, are representations made by a company’s management that are embodied in financial statements. They are essentially the claims management makes regarding the company’s financials. For auditors, it is crucial to ensure amounts recorded in the financial statements are accurate. This way, auditors can ascertain the financial statements are free from material misstatements.

Types of Due Diligence Services, Benefits, And Limitations

At the end of this article, you can also see the summary of all assertions and their usages. Transaction level assertions are made in relation to classes of transactions, such as revenues, expenses, dividend payments, etc. Clearly, materiality plays a large role; however, how to measure what information is true and fair or misstated is crucially important. 9/ AU sec. 333, Management Representations, establishes requirements regarding written management representations, including confirmation of management responses to oral inquiries. The following auditing standard is not the current version and does not reflect any amendments effective on or after December 31, 2016. All assets, liabilities, and equity interests should have been recorded.

Types of Management Assertions

• 1/ Auditing Standard No. 14, Evaluating Audit Results, establishes requirements regarding evaluating whether sufficient appropriate evidence has been obtained.
• By understanding these assertions, auditors can tailor their procedures to effectively test the financial information presented.
• Classification – that transactions are recorded in the appropriate accounts – for example, the purchase of raw materials has not been posted to repairs and maintenance.
• All assets, liabilities, and equity interests should have been recorded.
• Related party transactions, balances and events have been disclosed accurately at their appropriate amounts.
• The rapid advancement of technology has also transformed business operations and the audit landscape.

Completeness applies to both account balances and transactions and events. This assertion relates to whether the amounts in the financial statement are complete. Overall, audit assertions represent claims made by management when preparing financial statements. Presentation – this means that the descriptions and disclosures of transactions are relevant and easy to understand. There is a reference to transactions being appropriately aggregated or disaggregated.

• Understanding the audit assertions is very important from an investor’s viewpoint because almost every financial metric used to evaluate a company’s stock is verified through these assertions.
• With this assertion, auditors can check for various disclosures and their proper classification.
• Occurrence – this means that the transactions recorded or disclosed actually happened and relate to the entity.
• The reference to allocation refers to matters such as the inclusion of appropriate overhead amounts into inventory valuation.
• This assertion checks if asset, liability, or equity balances in the balance sheet actually exists.

Classification

Assets, liabilities and income summary equity balances have been valued appropriately. Account balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity. Since financial statements cannot be held to a lie detector test to determine whether they are factual or not, other methods must be used to establish the truth of the financial statements. While one does not prevail over another, auditors can still focus on some more.

Assertions in the Audit of Financial Statements

• Salaries and wages expense does not include the payroll cost of any unauthorized personnel.
• However, they may not show a true and fair view of the company’s standing.
• Rigorous examination of internal controls and adherence to accounting standards help auditors confirm that financial statements provide an accurate and comprehensive view of the company’s obligations and earnings.
• You need to note that leaving out any of the aspects of an account can lead to a false representation of the company’s financial health.
• Relevant test – reperformance of calculations on invoices, payroll, etc, and the review of control account reconciliations are designed to provide assurance about accuracy.
• All transactions that were supposed to be recorded have been recognized in the financial statements.

Relevant tests – in the case of property, deeds of title can be reviewed. Current assets are often agreed to purchase invoices although these are primarily used to confirm cost. Long term liabilities such as loans can be agreed to the relevant loan agreement. 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. To test for occurrence the procedures will go the other way and start with the entry in the ledger and check back to the supporting documentation to ensure the transaction actually happened.

Audit Procedures for Obtaining Audit Evidence

Rigorous examination of internal controls and adherence to accounting standards help auditors confirm that financial statements provide an accurate and comprehensive view of the company’s obligations and earnings. Relevant tests – auditors often use disclosure checklists to ensure that financial statement presentation complies with accounting standards and relevant legislation. These cover all items (transactions, assets, liabilities and equity interests) and would include for example confirming that disclosures relating to non–current assets include cost, additions, disposals, depreciation, etc. An external audit is a process where independent auditors examine a company’s financial statements. Based on their examination, they conclude whether those statements are free from material misstatements. They involve procedures usually used by the auditors to test a company’s guidelines, policies, internal controls, and financial reporting processes.