How Management Assertions Influence Financial Audits

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Assertions also help evaluate the effectiveness of internal controls by providing a benchmark for their performance. This dual focus on risk identification and mitigation ensures the audit process is thorough and effective. There are numerous audit assertion categories that auditors use to support and verify the information found in a company’s financial statements. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. Relevant tests – A review of the repairs and expenditure account can sometimes identify items that should have been capitalised and have been omitted from non–current assets. Reconciliation of payables ledger balances to suppliers’ statements is primarily designed to confirm completeness although it also gives assurance about existence.

Assertions and Audit Evidence

• If the evidence gathered suggests that an assertion is not supported, the auditor will perform additional procedures to resolve the matter.
• Substantive testing involves direct verification of financial statement elements through detailed examination of transactions and account balances.
• Presentation – this means that the descriptions and disclosures of assets and liabilities are relevant and easy to understand.
• Rights and obligations assertions are used to determine that the assets, liabilities, and equity represented in the financial statements are the property of the business being audited.
• Assertions also help evaluate the effectiveness of internal controls by providing a benchmark for their performance.

To evaluate the assertions made by management, auditors employ a combination of substantive procedures and tests of controls. Auditing assertions presents significant challenges due to the complexity and dynamism of financial reporting. One major issue is the increasing intricacy of financial instruments and transactions. As companies engage in sophisticated dealings, such as derivatives and cryptocurrency transactions, verifying related assertions becomes more challenging.

Audit Assertions

The existence or occurrence assertion relates to whether the management assertions in auditing recorded transactions and events actually occurred during the audit period. For example, when auditing revenue, the existence assertion ensures that the reported sales transactions are genuine and supported by evidence, such as sales contracts, customer invoices, and shipping records. The quality of audit evidence is paramount, and auditors prioritize evidence that is relevant and reliable. For instance, third-party confirmations or auditor-generated evidence typically carry more weight than evidence that is solely provided by the entity’s management.

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• Occurrence – this means that the transactions recorded or disclosed actually happened and relate to the entity.
• Rights and obligations assertion states that the entity holds or controls the rights to its assets and has obligations to settle its liabilities.
• The cut-off assertion is used to determine whether the transactions recorded have been recorded in the appropriate accounting period.
• Assertions, in the context of auditing, are management’s implicit or explicit claims about the financial statements.
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• Liabilities are another area that auditors will review to determine that any bills paid from the business belong to the business and not the owner.

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This assertion is particularly relevant for assets requiring estimation what are retained earnings or judgment, such as depreciation, allowance for doubtful accounts, or fair value measurements. Auditors assess whether the company’s valuation methods comply with standards like IFRS 13 on fair value measurement and whether assumptions used in estimates are reasonable. They might analyze historical data, market conditions, or third-party appraisals to validate asset valuations. Accurate valuation prevents distortions in financial reporting, aiding stakeholders in making informed decisions.

• Auditors review these assertions by examining the financial statements and accompanying notes, ensuring that the disclosures are complete, clearly presented, and free from material misstatements.
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• From an auditor’s viewpoint, these assertions are critical in guiding their efforts to verify the integrity of the financial information presented.
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• The Faculty of Finance and Accounting received the accreditation from the professional body ACCA (Association of Chartered Certified Accountants).
• For example, notes payable transactions should never be classified as an accounts payable transaction, with the same being true for interest payable transactions.

Rights and Obligations

For example, an auditor may want to examine payroll records to make sure that all salaries and wages expenses have been recorded in the proper period. This may include an examination of payroll records, a payroll journal, an active employee list, and any payroll accruals that were made and reversed in the period being examined. Completeness helps auditors verify that all transactions for the period being examined have been properly entered in the correct period. Bank deposits may also be examined for existence by looking at corresponding bank statements and bank reconciliations. They need to exercise professional skepticism and employ specialized techniques to detect potential manipulation or misrepresentation of financial information. All transactions and events that have been recorded have occurred and pertain to the entity.