What is the importance of assertions?

For example, if a balance sheet of an entity shows buildings with carrying amount of $10 million, the auditor shall assume that the management has claimed that:

• The buildings recognized in the balance sheet exist at the period end;
• The entity owns or controls those buildings;
• The buildings are valued accurately in accordance with the measurement basis;
• All buildings owned and controlled by the entity are included within the carrying amount of $10 million.

Types & Examples

Assertions may be classified into the following types:

A. Assertions relating to classes of transactions

AssertionsExplanationExample: Salaries & Wages Cost

Occurrence

Transactions recognized in the financial statements have occurred and relate to the entity.

Salaries & wages expense has been incurred during the period in respect of the personnel employed by the entity. Salaries and wages expense does not include the payroll cost of any unauthorized personnel.

Completeness

All transactions that were supposed to be recorded have been recognized in the financial statements.

Salaries and wages cost in respect of all personnel have been fully accounted for.

Accuracy

Transactions have been recorded accurately at their appropriate amounts.

Salaries and wages cost has been calculated accurately. Any adjustments such as tax deduction at source have been correctly reconciled and accounted for.

Cut-off

Transactions have been recognized in the correct accounting periods.

Salaries and wages cost recognized during the period relates to the current accounting period. Any accrued and prepaid expenses have been accounted for correctly in the financial statements.

Classification

Transactions have been classified and presented fairly in the financial statements.

Salaries and wages cost has been fairly allocated between:

• Operating expenses incurred in production activities;
• General and administrative expenses; and
• Cost of personnel relating to any self-constructed assets other than inventory.

B. Assertions relating to assets, liabilities and equity balances at the period end

AssertionsExplanationExample: Inventory balance

Existence

Assets, liabilities and equity balances exist at the period end.

Inventory recognized in the balance sheet exists at the period end.

Completeness

All assets, liabilities and equity balances that were supposed to be recorded have been recognized in the financial statements.

All inventory units that should have been recorded have been recognized in the financial statements. Any inventory held by a third party on behalf of the audit entity has been included in the inventory balance.

Rights & Obligations

Entity has the right to ownership or use of the recognized assets, and the liabilities recognized in the financial statements represent the obligations of the entity.

Audit entity owns or controls the inventory recognized in the financial statements. Any inventory held by the audit entity on account of another entity has not been recognized as part of inventory of the audit entity.

Valuation

Assets, liabilities and equity balances have been valued appropriately.

Inventory has been recognized at the lower of cost and net realizable value in accordance with IAS 2 Inventories. Any costs that could not be reasonably allocated to the cost of production (e.g. general and administrative costs) and any abnormal wastage has been excluded from the cost of inventory. An acceptable valuation basis has been used to value inventory cost at the period end (e.g. FIFO, AVCO, etc.)

C. Assertions relating to presentation and disclosures

AssertionsExplanationExample: Related Party Disclosures

Occurrence

Transactions and events disclosed in the financial statements have occurred and relate to the entity.

Transactions with related parties disclosed in the notes of financial statements have occurred during the period and relate to the audit entity.

Completeness

All transactions, balances, events and other matters that should have been disclosed have been disclosed in the financial statements.

All related parties, related party transactions and balances that should have been disclosed have been disclosed in the notes of financial statements.

Classification & Understandability

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.

The nature of related party transactions, balances and events has been clearly disclosed in the notes of financial statements. Users of the financial statements can clearly determine the financial statement captions affected by the related party transactions and balances and can easily ascertain their financial effect.

Accuracy & Valuation

Transactions, events, balances and other financial matters have been disclosed accurately at their appropriate amounts.

Related party transactions, balances and events have been disclosed accurately at their appropriate amounts.

Use and Application

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.

Why are assertions important for auditors?

Why are financial statement assertions important?

What are the most important assertions in auditing cash and why?

What are management assertions and what is the importance to the auditor?