How Management Assertions Influence Financial Audits

Transactions have been classified and presented fairly in the financial statements. Classification – means that assets, liabilities and equity interests are recorded in the proper accounts. Completeness – that there are no management assertions audit omissions and assets and liabilities that should be recorded and disclosed have been. In order to test completeness, the procedure should start from the underlying documents and check to the entries in the relevant ledger to ensure none have been missed. To test for occurrence the procedures will go the other way and start with the entry in the ledger and check back to the supporting documentation to ensure the transaction actually happened.

• Certain representations in this letter are described as being limited to matters that are material.
• All inventory units that should have been recorded have been recognized in the financial statements.
• Hence, the financial statements contain management’s assertions about the transactions, events and account balances and related disclosures that are required by the applicable accounting standards such as US GAAP or IFRS.
• Auditors assess the design and implementation of these controls, and their effectiveness over the reporting period, to determine the level of reliance that can be placed on the management’s statements.
• This article will focus on assertions as identified by ISA 315 (Revised 2019) and also provides useful guidance to candidates on how to tackle questions dealing with these.
• Auditing Standard No. 3, Audit Documentation, establishes requirements regarding documenting the procedures performed, evidence obtained, and conclusions reached in an audit.

Audit Procedures for Obtaining Audit Evidence

Central to this process are management assertions—claims made by an organization’s executives regarding the financial data they present. The illustrative letter assumes that management and the auditor have reached an understanding on the limits of materiality for purposes of the written representations. However, it should be noted that a materiality limit would not apply for certain representations, as explained in paragraph .08 of this section. In many cases, the meaning of the assertions is fairly obvious and in preparation for their FAU or AA exam candidates are reminded of the importance to learn and be able to apply the use of assertions in the course of the audit.

Assertions and Audit Evidence

• In contrast, audit assertions are the tools or lenses used by auditors to examine and test those claims.
• The reliability of management assertions is a fundamental aspect of the audit process.
• This responsibility entails an understanding of the business and its environment, including the industry in which it operates, regulatory factors, and other external influences that may affect the financial statements.
• Audit entity owns or controls the inventory recognized in the financial statements.
• To avoid misunderstanding concerning the meaning of such terms, the auditor may wish to furnish those definitions to management or request that the definitions be included in the written representations.
• At this stage the auditor will design substantive procedures to ensure that assurance has been gained over all relevant assertions.

Accuracy, valuation and allocation – means that amounts at which assets, liabilities and equity interests are valued, recorded and disclosed are all appropriate. The reference to allocation refers to matters such as the inclusion of appropriate overhead amounts into inventory valuation. 1/ Auditing Standard No. 14, Evaluating Audit Results, establishes requirements regarding evaluating whether sufficient appropriate evidence has been obtained. Auditing Standard No. 3, Audit Documentation, establishes requirements regarding documenting the procedures performed, evidence obtained, and conclusions reached in an audit. Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and reliability.

Sufficient Appropriate Audit Evidence

The qualitative discussion of materiality used in the illustrative letter is adapted from FASB Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information. Relevant tests – Vouching the cost of assets to purchase invoices and checking depreciation rates and calculations. Relevant test – select a sample of customer orders and check to dispatch notes and sales invoices and the posting to the sales account in the general ledger. For example, we examine the office supplies expense $3,500 in the general ledge recorded on 18 Jul 2019 by inspecting the supplier invoice, purchase order and receiving report.

All transactions, balances, events and other matters that should have been disclosed have been disclosed in the financial statements. Management assertions are primarily used by the external auditors at the time of audit of the company’s financial statements. The auditor’s approach to gathering evidence is not static; it is responsive to the findings as the audit progresses. If the evidence gathered suggests that an assertion is not supported, the auditor will perform additional procedures to resolve the matter. This iterative process continues until the auditor obtains reasonable assurance about the assertions under consideration.

During the final audit, the focus is on the financial statements and the assertions about assets, liabilities and equity interests. At this stage the auditor will design substantive procedures to ensure that assurance has been gained over all relevant assertions. The audit assertions can provide us the clues on the potential misstatements that might occur on financial statements. Likewise, we usually use these assertions to assess external financial reporting risks. To the best of our knowledge and belief, no events have occurred subsequent to date of latest balance sheet reported on by the auditor and through the date of this letter that would require adjustment to or disclosure in the aforementioned financial statements. Management assertions are the claims or representations made by management in the financial statements.

Sufficient and appropriate disclosures have been made on related transactions, events and account balances. These assertions play a pivotal role in guiding auditors during their examination. They serve as benchmarks against which the veracity and completeness of financial information can be measured. The importance of these claims cannot be overstated; they underpin the trust that investors place in financial reports. We confirm, to the best of our knowledge and belief, as of (date of auditor’s report), the following representations made to you during your audit(s).

• If the evidence gathered suggests that an assertion is not supported, the auditor will perform additional procedures to resolve the matter.
• By gaining this understanding, auditors can identify the types of potential misstatements and the factors that may affect the risk of their occurrence.
• 8/ AU sec. 331, Inventories, establishes requirements regarding observation of the counting of inventory.
• Rights and obligations assertion states that the entity holds or controls the rights to its assets and has obligations to settle its liabilities.
• Audit Assertions are the implicit or explicit claims and representations made by the management responsible for the preparation of financial statements regarding the appropriateness of the various elements of financial statements and disclosures.
• In this instance, for example procedures performed at the inventory count which provide evidence of existence and completeness of inventory would not be relevant.

In this case, we can determine the different types of misstatements that could occur for each of the relevant audit assertions and then develop auditing procedures that are appropriate to respond to the assessed risks. Auditors must also ensure that their evaluation of assertions is comprehensive, covering all financial statement components. They must consider the interrelationships between financial statement elements and how misstatements in one area could affect another. This holistic approach ensures that auditors do not view assertions in isolation but understand their collective impact on the financial statements’ integrity.

How to Prepare An Internal Audit Program? Tips and Guidance

Classification – that transactions are recorded in the appropriate accounts – for example, the purchase of raw materials has not been posted to repairs and maintenance. Management assertions and audit assertions are related concepts, but they are not the same thing. The above procedure is also known as “three-way matching” which refers to the matching of three supporting documents, including invoice, purchase order and receiving report. Opposite to right and obligation, we test the audit assertion of cut-off for income statement transactions only. Items in the balance sheet have been appropriately evaluated and allocated to reflect how is sales tax calculated their actual economic value.