The implicit or explicit claims by the management about 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 usages of each assertion as well as how important it is for management and auditor. At the end of this article, you can also see the summary of all assertions and their usages.
Well, audit assertions generally classified into three major categories
- Transaction Level Assertions
- Account Balance Assertions
- Represent and Disclosure Assertions
Transaction Level Assertions:
These assertions may be classified into the following five items
- Completeness: It means that all the business transactions related to the company’s business needed to be recorded, are recognized in the company’s financial statements. For example, the cost of direct and indirect material is fully measured and recognized. All the sales transactions that occurred during the period are completely recorded in the financial statements
- 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.
- 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 a production expense. The loan is correctly classified as current and non-current assets.
- 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.
- Cut-Off: This assertion means that all the transactions are recorded in their respective periods or the correct period. For example, the cost of material recognized in the financial statements relates to the current accounting period. Or the transactions are correct in the period that they have occurred.
Account Balance Assertions:
These assertions are classified into the following four items
- 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 own by the entity while the balance of account payable is an obligation on the entity.
- Existence: Balances of assets, liabilities, and equity exists at the end of the period. For example, inventory recognized in the balance sheet exists at the end of the period.
- 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.
- 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 assertions is that all the financial information included in the financial statements are disclosed accurately at their appropriate amount. For example, the balance of account 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 are 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.
Table of Assertions:
|1||Completeness:||This assertion is concerting the completeness of transactions that occurred during the period that recording in the financial statements. For example, whether the expenses or revenues that occurred during the year ending 2020 are complete records in the financial statements of the year ending 31 December 2020.|
|2||Accuracy||Accuracy assertion concerning the correctness of transactions or balance at recording the financial statements is agreed to their actual amounts or without any material variance. For example, the sales amount of USD1,000 is correctly recorded as USD1,000 in the financial statements. It is not USD100 or USD10,000.|
|3||Classification||This 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 in the cost of goods sold rather than administrative expenses.|
|4||Occurrence||This 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 transactions records in the entity’s financial statements are related to the entity.|
|5||Cut-off||The 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.|
|6||Rights and obligations||This 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 record in the financial statements really belong to the company, not the shareholders.|
|7||Existence||This assertion is used to assess if the assets or liabilities being records are really existing at the reporting dates. For example, there are inventories records in the financial statements that the procedures that use to assess if the inventories are really existed at the reporting date by management or auditors are inventories count or observation.|
|8||Valuation:||It is concerning the value of assets, and liabilities account that is recorded in the financial statements 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.|