What Are the Audit Assertions? Definition, Types, And Explanation

Definition:

The implicit or explicit claims by the management on the preparation and appropriateness of financial statements and disclosures are known as management assertions. It is also known are financial statements assertion or audit assertion.

In other words, audit assertions are sometimes called financial statements Assertions or management assertions.

It means that management implicitly or explicitly claims that the value of assets, liabilities, income, expenses, and equity shown in financial statements are correctly measured and disclosed according to the applicable financial reporting framework.

Management assertions are primarily used by the external auditors at the time of audit of the company’s financial statements.

In this article, we will discuss the nature and the usage of each assertion as well as how important it is for management and auditors. At the end of this article, you can also see the summary of all assertions and their usages.

Audit assertion, Management assertion, Financial statements assertions

Well, audit assertions generally classified into three major categories

  1. Transaction Level Assertions
  2. Account Balance Assertions
  3. Represent and Disclosure Assertions

Transaction Level Assertions:

These assertions may be classified into the following five items

  1. Completeness: It means that all the business transactions related to the company’s business need to be recorded, and are recognized in the company’s financial statements. For example, the cost of direct and indirect materials is fully measured and recognized. All the sales transactions that occurred during the period are completely recorded in the financial statements
  2. Accuracy: It means that the actual value of transactions is fully recorded without any error. For example, the value of all direct and indirect costs of a product is accurately recorded or calculated without any error.
  3. Classification: This assertion means that transactions or items are classified and recorded in their proper accounts or classification. For example, salaries of office staff are classified and recorded as administrative expenses while wages related to the product department are recorded as production expenses. The loan is correctly classified as current and non-current assets.
  4. Occurrence: This assertion means that all the recorded transactions actually take place in the normal course of business. For example, the cost of material recognized in the financial statements has been incurred as a result of units produced in the company’s production department.
  5. Cut-Off: This assertion means that all the transactions are recorded in their respective periods or the correct period. For example, the cost of materials recognized in the financial statements relates to the current accounting period. Or the transactions are correct in the period that they have occurred.
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Account Balance Assertions:

These assertions are classified into the following four items

  1. Rights and obligations: This means that the entity owns the ownership rights for all the assets recognized in the balance sheet and all the recognized liabilities are the obligations of the entity. For example, this assertion means that the inventory recognized in the entity’s balance sheet is owned by the entity while the balance of accounts payable is an obligation on the entity.
  2. Existence: Balances of assets, liabilities, and equity exist at the end of the period. For example, inventory recognized in the balance sheet exists at the end of the period.
  3. Completeness: Balances of assets, liabilities, and equity are recognized fully in the financial statements. For example, the value of all the inventory is recognized and nothing is left behind.
  4. Valuation: Balances of assets, liabilities, and equity have been recorded at their proper valuations. For example, the value of inventory is recognized at the lower of cost or net realizable value.

Presentation and Disclosure Assertions:

These assertions are classified into the following five items

  • Accuracy: The assertion is that all the financial information included in the financial statements is disclosed accurately at their appropriate amount. For example, the balance of accounts receivable has been accurately disclosed.
  • Occurrence: This assertion means that all the disclosed transactions have actually occurred for business purposes.
  • Completeness: This means that all the transactions supposed to be disclosed in the financial statements have been disclosed completely.
  • Understandability: This means that all the financial information in the financial statements is classified properly and presented in a view to understanding easily by the user.
  • Rights and Obligation: All the disclosed rights and obligations are actually related to the audited entity.
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Table of Assertions:

NoAssertionsDescription
1CompletenessThis assertion means that transactions or items are classified and recorded in their proper accounts or classification. For example, the cost of goods sold is correctly classified as the cost of goods sold rather than administrative expenses.
2AccuracyIt concerns the value of assets and liabilities that are recorded in the financial statements and are correctly valued based on the applicable accounting standards or accounting policies that are used by the entity. For example, valuation gross and valuation net of inventories.
3ClassificationThis assertion means that all the recorded transactions actually take place in the normal course of business. This assertion is also used to assess if the transaction records in the entity’s financial statements are related to the entity.
4OccurrenceThis assertion concerns the rights and obligations of assets and liabilities that are being recorded in the entity’s financial statements. For example, if the cars and computers that are recorded in the financial statements really belong to the company, not the shareholders.
5Cut-offThe cut-off is used to assess if the transactions are recorded in the correct accounting period. Or we can say if the transactions are being the period that they are recording.
6Rights and obligationsThis assertion is used to assess if the assets or liabilities being recorded are really existing at the reporting dates. For example, there are inventory records in the financial statements that the procedures used to assess if the inventories really existed at the reporting date by management or auditors are inventories count or observation.
7ExistenceIt concerns the value of assets and liabilities that are recorded in the financial statements and are correctly valued based on the applicable accounting standards or accounting policies that is used by the entity. For example, valuation gross and valuation net of inventories.
8ValuationIt concerns the value of assets and liabilities that are recorded in the financial statements and are correctly valued based on the applicable accounting standards or accounting policies that are used by the entity. For example, valuation gross and valuation net of inventories.

Are management assertion and audit assertion the same?

Management assertions and audit assertions are related concepts, but they are not the same thing.

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Management assertions are the claims or representations made by management in the financial statements. In contrast, audit assertions are the tools or lenses used by auditors to examine and test those claims. Both are fundamental to the audit process, with the former being the subject of the audit and the latter guiding the methodology of the audit.

Here’s the distinction:

Management Assertions:

  • These are claims made by the management regarding the recognition, measurement, presentation, and disclosure of items in the financial statements.
  • For example, when management presents a balance sheet, they are asserting that the amounts presented for assets and liabilities are accurate and complete, and they have rights to those assets or obligations for those liabilities.
  • Essentially, through the financial statements, management is asserting that the information provided is in accordance with the relevant accounting framework.

Audit Assertions:

  • These are what auditors use as a framework to design their audit procedures and gather evidence.
  • Audit assertions are derived from management’s assertions. They provide a structured way for auditors to examine the claims made by management in the financial statements.
  • For instance, when an auditor is looking at a company’s accounts receivable balance, they might use assertions like “existence” (to confirm that those receivables actually exist) and “valuation” (to check if those receivables are presented at their appropriate value).