In other words, if your small business is being audited, the auditor may ask for proof that the cash balance of your bank account belongs to the business. When performing an audit, it is the auditor’s job to obtain the necessary evidence to verify the assertions made in the financial statements. Whether you’re using accounting software or recording transactions in multiple ledgers, the audit assertion process remains the same. Management assertions are the claims or representations made by management in the financial statements.
Presentation and disclosure assertion refers to the proper classification, description, and disclosure of information in the financial statements. Auditors review whether the financial statements comply with relevant accounting frameworks, ensuring that they provide users with a clear and accurate understanding of the company’s financial position and performance. The existence or occurrence assertion relates to whether auditing assertions list the 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. In the world of finance, auditing plays a crucial role in ensuring the accuracy and reliability of financial statements.
What are the different audit assertions?
As you consider the significant account balances, transaction areas, and disclosures, specify the relevant assertions. So you can determine the risk of material misstatement for each and create responses. As auditors, we usually audit inventory by testing the various audit assertions including existence, completeness, rights and obligations, and valuation. In the audit process of inventory, physical inventory count may be the most important part of the inventory audit.
- While classifying audit assertions based on importance is not possible, some of them may be more crucial.
- The occurrence assertion is used to determine whether the transactions recorded on financial statements have taken place.
- Inspection of records or documents is the process of gathering evidence by examining the records or documents.
- Relevant tests – Vouching the cost of assets to purchase invoices and checking depreciation rates and calculations.
- Payroll and inventory balances are often checked for cut-off accuracy to determine that the activity that took place was recorded in the appropriate period.
- The existence assertion verifies that assets, liabilities, and equity balances exist as stated in the financial statement.
Therefore, this holds tantamount importance from the point of view of not only the auditor but also from the general users of financial statements. Auditors use this assertion to confirm assets, liabilities, and equity recorded in a company’s financial statements actually belong to that same company. This assertion confirms the liabilities, assets, and equity balances recorded in a financial statement actually (you guessed it) exist. The auditor is required to collect whatever evidence is necessary to establish a connection between the values on the document and their real world counterparts. As with completeness, auditors use cut-off to determine transactions are recorded within the proper accounting period.
Auditing Procedures for Testing Assertions
This is particularly important for those accruing payroll or reporting inventory levels. There are numerous audit assertion categories that auditors use to support and verify the information found in a company’s financial statements. To evaluate the assertions made by management, auditors employ a combination of substantive procedures and tests of controls.
This type of audit procedures is used to test the client’s control procedures. Observation is the process that the auditors perform by looking at the procedures being performed by the client. This type of audit procedures provides evidence that the client’s procedures actually take place at the time the auditors perform the observation.