Assertions in Auditing
These are the claims which indicate the true and fair representation of the financial statements.
The claims which indicate the true and fair representation of the financial statements are called assertions.
These form an integral part of auditing. However, as the fairness and factual quality of the financial statements cannot be tested through a lie detector test, other methods need to be developed to check if the financial statements have been presented fairly.
A statement that the speaker trusts is called an assertion. Anything can be an assertion. For example, "Technical analysis can generate positive risk-adjusted returns." However, it is complicated to compute the estimation of its trueness.
In the same way, determining if particular financial information is factual or not, it is very difficult. Objectivity is a big factor. Moreover, measuring which statement is true and fair or misrepresented is very crucial.
Therefore, they have a crucial role in identifying misstated information in the financial statements when auditing.
- These are statements regarding the accuracy of the financial statements reported by the company.
- These assertions are needed to testify to the quality of the information included in the cash flow statements, balance sheets, and the profit and loss account.
- The company's shareholders, stakeholders, and analysts analyze a company's stock through fundamental analysis using financial statements.
- Publicly traded companies must prepare their financial statements according to GAAP by The Financial Accounting Standards.
- Assertions related to existence, accuracy and valuation, rights and obligations, and presentation and disclosure must be followed by the companies.
Attributes of financial records that require testing for their correctness and appropriateness are called assertions. For example,recorded correctly if all of them are fulfilled for relevant transactions.
As a part of the audit process, anwould have to check whether the assertions made by the company regarding the company's income, assets held, and liabilities owed to the company and disclosures made in the financial statements.
The International Accounting Standards Board aimed to provide transparent accounting concepts that can be used to compare companies worldwide. Therefore, the board issued the International Financial Reporting Standards along with the IFRS foundation.
There are three types, each of which relates to different events:
- Transaction Level
- Presentation And Disclosure
Those related to classes of transactions, like revenues,, expenses, etc., are called transaction-level assertions.
Different types of transaction-level are mentioned below:
- Occurrence: Those about the occurrence of a transaction, that is, did it happen?
- Completeness: Transactions that have been completed should be recorded in the financial statements. Have they been recorded?
- Accuracy: Transactions recorded in the financial statements, have they been recorded at correct quantities, prices, and calculations justified or not?
- Cut-off: Transactions recorded correctly; have they been recognized in the right period?
- Classification: This focuses on whether the transactions have been fairly represented in the financial statements.
- Presentation – Whether the transactions and events have been aggregated or disaggregated appropriately, and whether the relevant disclosures have been made, and if made, are they understood to be applied in the financial reporting framework?
Presentation and Disclosure
The second type is the assertion associated with presenting and disclosing financial statements.
This concerns whether all the disclosures and appropriate information other than that presented in the company's financial statements are fairly represented and easy to understand. These are called understandability assertions.
Different types of presentation and disclosure are given below:
- : Whether the transactions, financial records, and balances have been presented accurately and at correct values.
- Classification and Understandability: Whether the transactions, financial records, and balances are classified and represented truly to increase the financial statement's readers' convenience.
- Completeness: Whether the transactions, financial records, and balances are disclosed completely in a true and fair picture.
- Occurrence: Whether the transactions, balances, and financial records did occur and the company is related to it.
Account balance assertions areitems such as inventory, liabilities, stockholder's equity, and debt capital.
Different types of account balances are mentioned below:
- Existence: Whether the liabilities, asset balances and stockholder's equity exist or not at the end of the period.
- Completeness: Whether the liabilities, asset balances and stockholder's equity that exist and should be recorded have been recorded or not.
- Rights and Obligations: Whether the company has ownership rights of the assets recorded in the balance sheet. Also, whether the liabilities mentioned in the balance sheet correctly represent the company's obligations.
- Valuation: Whether the liabilities, asset balances and stockholder's equity are valued using correct valuation methods.
- Presentation – Whether the equity interests, assets, and liabilities have been aggregated or disaggregated appropriately, whether the relevant disclosures have been made, and if made, are they understood to be applied in the financial reporting framework?