Transactions and events have been recorded in the proper accounts.

Claims that establish whether or not financial statements are true and fairly represented in auditing

Assertions are claims that establish whether or not financial statements are true and fairly represented in the process of auditing.

Transactions and events have been recorded in the proper accounts.

Importance of Assertions

Assertions are an important aspect of auditing. 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.

Assertions are defined as “a statement that is believed to be true by the speaker. “An assertion can be anything, e.g., “I assert that fundamental value investing is the best investing philosophy.”

However, it is difficult to measure whether the statement is indeed true. Similarly, with financial statements, it is difficult to determine what financial information is free from material misstatement.

There are two aspects to material misstatement. Clearly, materiality plays a large role; however, how to measure what information is true and fair or misstated is crucially important.

Assertions play a key role in determining what is true and fair when auditing financial records.

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.

The International Financial Reporting Standards (IFRS) are a set of accounting standards issued by the International Accounting Standards Board (IASB) and the IFRS Foundation aimed towards providing a common set of accounting rules that are consistent, transparent, and comparable internationally.

IFRS developed ISA315, which includes categories and examples of assertions that may be used to test financial records.

There are two types of assertions, each of which relates to different events:

1. Transaction Level Assertions

Transaction level assertions are made in relation to classes of transactions, such as revenues, expenses, dividend payments, etc.

There are five types of transaction-level assertions:

  • Occurrence: Transactions that are recognized in the financial records as having occurred, i.e., did it really happen?
  • Completeness: Transactions that are completed and supposed to be recorded have been recognized in the financial statements, i.e., did it include all transactions?
  • Accuracy: Transactions have been accurately reflected within the financial statements at appropriate amounts, i.e., have correct prices, quantities, and calculations been used?
  • Cut-off: Transactions that have been recognized in correct and relevant accounting time periods.
  • Classification: Transactions have been classified properly and fairly presented in the financial statements.

2. Account Balance Assertions

Account balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity.

There are four types of account balance assertions:

  • Existence: The assets, equity balances, and liabilities exist at the period ending time.
  • Completeness: The assets, equity balances, and the liabilities that are completed and supposed to be recorded have been recognized in the financial statements.
  • Rights and Obligations: The entity has ownership rights or the right to benefit from recognized assets on the financial statements. Liabilities recognized in the financial statements represent the actual obligations of the entity.
  • Valuation: The assets, equity balances, and liabilities have been valued appropriately.

3. Presentation and Disclosure Assertions

It is the third assertion type that can fall under both transaction-level assertions and account balance assertions. It relates to the presentation and disclosure of financial statements.

There are four types of presentation and disclosure assertions:

  • Accuracy and Valuation: Transactions, balances, and other financial records have been disclosed accurately and at the appropriate valuations.
  • Classification and Understandability: Transactions, events, balances, and other financial records have been classified properly and presented in a clear manner that promotes understandability to the users of the financial statements.
  • Completeness: Transactions, events, balances, and other financial records have been disclosed completely within the financial statements.
  • Occurrence: Transactions, events, balances, and other financial records have occurred and are related to the entity.

Related Readings

Thank you for reading CFI’s guide to Assertions in Auditing. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

Assertions are representations of management that are embodied in all financial statement components or classifications.  Specific audit objectives are developed in each audit area to evaluate the appropriateness and reasonableness of relevant financial statement assertions.  Auditing procedures are performed in each audit area to accomplish the audit objectives. From SAS No. 106, Audit Evidence, the assertions are:

For classes of transactions and events:

1.    Occurrence—All transactions and events that have been recorded have occurred and pertain to the entity.2.    Completeness—All transactions and events that should have been recorded have been recorded.3.    Accuracy—Amounts and other data relating to recorded transactions and events have been recorded appropriately.4.    Cutoff—Transactions and events have been recorded in the correct accounting period.

5.    Classification—Transactions and events have been recorded in the proper accounts.

For account balances at the period end:

1.    Existence—Assets, liabilities and equity interests exist.2.    Rights and Obligations—The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.3.    Completeness—All assets, liabilities, and equity interests that should have been recorded have been recorded.

4.    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.

For presentation and disclosure:

1.    Occurrence and Rights and Obligations—Disclosed events and transactions have occurred and pertain to the entity.2.    Completeness—All disclosures that should have been included in the financial statements have been included.3.    Classification and Understandability—Financial information is appropriately presented and described and disclosures are clearly expressed.

4.    Accuracy and Valuation—Financial and other information are disclosed fairly and at appropriate amounts.

Here is an easy way to remember relevant assertions for transactions, balances and disclosures:

    C  ompleteness        To determine that all transactions and accounts that should be presented

        have been included in the financial statements.

    O  ccurrence and cutoff        To determine that all transactions occurring during the period have been

        recorded in the financial statements in the proper period.

    V  aluation and accuracy        To determine that all asset, liability, revenue and expense components

        have been included in the financial statements at accurate amounts,  classified properly.

    E  xistence        To determine that all recorded assets and liabilities exist at a given

        date.

    R  ights
        To determine that the entity has rights to all assets recorded at a given date.

    O  bligations
        To determine that all liabilities are obligations of the entity at a given date.

    D  isclosure and Presentation
        To determine that all components of the financial statements and other transactions and events are accurately classified,                 clearly described and disclosed.

Audit programs from most firms’ accounting and auditing manuals are designed in a standard, all-inclusive format.  That is, most conceivable auditing procedures have been included.  To ensure we evaluate all applicable financial statement assertions, the auditor must consider relevant assertions during the risk assessment process and when designing and modifying programs.  Failure to eliminate certain unnecessary procedures may result in overauditing.  Eliminating other procedures without considering the relevant assertions applicable to each account balance could result in collecting insufficient evidence.  Eliminating all tests of controls, for example, without adding other analytical or tests of balances procedures, may omit procedures for verifying the completeness assertion for revenue.

For live and on-demand webcasts on modifying audit programs to enable auditors to evaluate relevant financial statement assertions, click on the applicable box on the left side of my home page, www.cpafirmsupport.com.