Updated July 19, 2023
Definition of Audit Assertions
Audit assertions are the checkpoints that the auditor needs to check regarding the implicit or explicit claims, in respect of any income, expense, asset or liability or any disclosure per se to comply with requirements of the applicable financial reporting framework (FRF), made by the management and such check may or may not have implications on the audit report (depending on the type of audit assignment).
Explanation
- “Assertion” means any forceful statement of fact or belief. The management makes assertions regarding assets, liabilities, incomes, expenses, etc. An auditor needs to check the validity of those assertions. So, we say “audit assertions”.
- A simple question arises “Who has asked the auditor to check the same”? The auditing standards apply to the auditors. Those standards require the audit to comply with the requirements. Thus, an auditor has ethical & professional duty to comply with the auditing standards.
- Let’s say that the organization’s balance sheet presented $ 250 million as “Plant & Machinery” on December 31, 2019. This means the following:
- That plant & machinery exists on that date (i.e. existence assertion).
- Management has some measurement basis for arriving at the value of $ 250 million (i.e. valuation assertion).
- The company owns & controls the entire plant & machinery.
- The company has all the rights & obligations in relation to the said plant & machinery (i.e. rights & obligation assertion).
- All existing plants & machinery are captured in the figure of $ 250 million (i.e. completeness assertion).
Audit Assertions for Investments
- Investments are the amounts the entity allocates into some fixed deposits, mutual funds, systematic investment plans (SIP), corporate bonds, equities of another company, or any other instrument. The company reported $ 160 million as “Investments” in the balance sheet on December 2019. The auditor needs to check the following assertions to opine on the value as disclosed:
1. Existence
The investments should exist as of the said date. For these, the auditor needs to verify the backup documents which claim such investments have been made by the company. Thus, documentation helps here in ensuring its existence. Also, the auditor may ask for third-party verification of the balance as of the said date.
2. Accuracy
By accuracy, we mean that each investment is valued under the appropriate head with the broad heading of “investments”.
3. Valuation
Valuation assertion says the value should be per the relevant accounting framework. Few accounting standards also require a provision in case of unrealized loss. Thus, the auditor needs to ensure that the value appearing on the face of the balance sheet is appropriate.
4. Cut-Off
Cut-off means the end date the investments relate to a particular year. In our example, the cut-off date is December 31, 2019. Only the investment made until the last date should be reflected as investments as of the said date.
5. Rights
An entity should have the right to redeem the investments. The right is specified in the agreement, contract, or the investment’s supporting document.
6. Presentation
The presentation should be made as the applicable financial reporting framework.
Audit Assertions Depreciation
Depreciation is a fixed charge on the entity’s property, plant & equipment. Depreciation is a non-cash expenditure. Since no cash outflow is involved, an auditor needs to be alert for the allocation of the expense & calculation done. Say the company has presented $ 15 million as depreciation on the face of the statement of profit & loss. Thus, an auditor needs to carry out assertions of profit & loss statements. Since the accumulated depreciation is shown as a reduction from the gross figure of “Property, plant & equipment”, the auditor must also carry out balance sheet assertions regarding the provision amount. The auditor needs to check the following assertions:
- Check whether the assets exist as of the said date. If no, then depreciation should not be charged after the asset is disposed of.
- Check the basis of depreciation calculation followed by the entity. This defines the valuation assertion.
- Check whether any expense is claimed as an asset that does not fit the capitalization criteria. In that case, even depreciation should not be claimed. This defines the accuracy assertion.
- Ensure that cut-off procedures are applied in recognizing the fixed assets figures. Completeness of the accounting of property, plant & equipment ultimately affects the completeness of a depreciation charge.
- The company can charge depreciation only regarding assets owned by the entity. This defines the obligations assertion.
- Check whether the presentation is appropriate as required by the applicable financial reporting framework.
Audit Assertions Balance Sheet
| Assertions | Explanation | Example |
| Existence | This ensures whether the same exists on that date. A physical verification report helps here. | Amount of property, plant & equipment compared to fixed assets register maintained by the company. Third-party verification of assets can be helpful here. |
| Rights & obligations over the assets | There should be a right to use those assets. The company should accept any obligation arising out of such assets. | The company holds inventory on the said date. If the company holds some goods as consignees, they should not be included in the figure inventory. Also, the company has to make provisions for slow-moving inventory. |
| Valuation | The valuation should be made as the applicable accounting standard. | Trade receivables should be held at realizable value. Thus, provision for bad & doubtful debts is made. |
| Completeness | Cut-off procedures are important to ensure all assets are reflected till the end of the year. | There may be some inventory in transit at the end of the year, wherein the entity has rights & obligations on the inventory, but the same is not physically received. Thus, we record such inventory as an asset. |
| Classification | This ensures the assets, liabilities, incomes & expenses are not misclassified. | Repairs to machinery may represent minor repairs. If treated as a fixed asset, it must be reclassified as an expense. |
| Presentation | This should be in compliance with the applicable FRF. | The provision for slow-moving inventory should present as a deduction from inventory on the assets side of the balance sheet. Provision for bad & doubtful debts should also be presented as a reduction from Trade receivables. |
Why are Audit Assertions Important?
- Audit assertions ensure the authenticity of the figures presented on the face of financial statements and the appropriate disclosures made in the said financial statements.
- As a reader of financial statements, people are concerned about whether the figures appearing in the financial statements are true and fair enough. This assurance is to be provided by an independent person known as an auditor.
- So as a part of the audit engagement, he needs to testify to the assertions made by the management regarding the assets held by the company, liabilities accepted by the company, income recognized by the company, expenses incurred during the period & disclosures made in the financial statements.
- These assertions help the auditor reduce the risk of material misstatement in the financial statements.
- Thus, the truth & fairness of the financial statements is justified with the help of audit assertions.
Conclusion
Audit assertions are checking the claims made by the management. If the auditor finds that the claims are inappropriate, it has implications for the audit report of the entity. The extensive level of assurance gives more reasonable confidence to the auditor. The audit report is the main thing investors search for in the whole set of annual reports. Thus, audit assertions are the major test checks for the auditor to opine whether the financial statements are free from material misstatement.
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This is a guide to Audit Assertions. We also discuss the definition, audit assertions for investments and their importance. You may also have a look at the following articles to learn more –
