In the auditing process, assertions are claims that determine if financial statements are genuine and correctly represented. In terms of the existence or occurrence of assets, liabilities, or transactions, the completeness of information in the financial statements, rights and obligations at a specific point in time, appropriate valuation or allocation, presentation, and disclosure, management asserts that financial statements are correct. In auditing or auditing, assertions or management assertions simply refer to what management claims.
Audit assertions are claims made by a company’s management, either tacitly or expressly, about the accuracy of the financial statements and the disclosures included within. Because financial statements cannot be subjected to a lie detector test to determine if they are true or not, other procedures must be employed to verify their accuracy. Assertions are defined as “a statement that the speaker believes to be true.”
Similarly, it is largely the duty of the entity’s management to create financial statements that recognize, measure, present, and disclose all assets, liabilities, earnings, and costs in line with the appropriate financial reporting framework. However, determining whether or not the assertion is correct is challenging. Similarly, it is difficult to evaluate whether financial information is free of serious misrepresentation in financial statements.
The management responsible for the production of financial statements makes implicit or explicit assertions and representations about the propriety of different parts of financial statements and disclosures. Material misstatement has two components. Clearly, materiality plays a significant role; nevertheless, determining whether the information is real and fair vs misrepresented is critical.
When reviewing financial data, assertions are critical in evaluating what is accurate and fair. Management Assertions and Financial Statement Assertions are two types of audit assertions. Transactions, account balances, and disclosures all come within the category of assertions. Assertions are qualities that must be verified in order to guarantee that financial records and disclosures are accurate and suitable. Financial statements are properly reported if all claims for relevant transactions or balances are satisfied.
Management makes implicit or explicit claims (i.e. assertions) about the recognition, measurement, and presentation of assets, liabilities, equity, income, and disclosures in line with the appropriate financial reporting framework while compiling financial statements. All claims should be correct, recorded in the appropriate accounts, and valued appropriately. Assertions help auditors think about a wide variety of issues related to the accuracy of financial accounts.
The International Financial Reporting Standards (IFRS) are a collection of accounting standards developed by the International Accounting Standards Board (IASB) and the IFRS Foundation with the goal of establishing a uniform, transparent, and comparable set of accounting principles throughout the world. Furthermore, the statements should confirm that the entity has its rights to the firm’s assets and is bound by the firm’s obligations. All information in the financial accounts should be presented in a clear and understandable manner.
Assertions are simply truths made by members of management that are included in Financial Statements, either tacitly or explicitly. The following management claims must be used by auditors to test the financial statements:
- Rights and obligations
There are two types of assertions, each of which relates to different events:
Transaction Level Assertions –
Assertions at the transaction level are made in respect to transaction types such as revenues, costs, dividend payments, and so on.
There are five types of transaction-level assertions:
- Occurrence: Transactions that are recognized in the financial records as having occurred, i.e., did it really happen?
- Completeness: Have all completed and expected to be recorded transactions been recognized in the financial accounts, i.e., have all transactions been included?
- Accuracy: Have all transactions been correctly reported in the financial accounts at the proper amounts, i.e., have the correct prices, quantities, and computations been used?
- Cut-off: Transactions that have been properly recorded in the appropriate accounting time periods.
- Classification: In the financial accounts, transactions have been appropriately categorized and reported honestly.
Account Balance Assertions –
Balance sheet components such as assets, liabilities, and shareholders’ equity are subject to account balance allegations.
There are four types of account balance assertions:
- Existence: The assets, equity balances, and liabilities exist at the period ending time.
- Completeness: The finished and supposed-to-be-recorded assets, equity balances, and liabilities have been recognized in the financial statements.
- Rights and Obligations: The entity owns or has the right to profit from assets that have been recorded in the financial accounts. The real obligations of the organization are represented as liabilities in the financial accounts.
- Valuation: The assets, equity balances, and liabilities have been valued appropriately.
Presentation and Disclosure Assertions –
It’s the third sort of assertion that may be found in both transaction-level and account-balance assertions. It has to do with how financial statements are presented and disclosed.
There are four types of presentation and disclosure assertions:
- Accuracy and Valuation: Transactions, balances, and other financial data have been appropriately declared and valued at the appropriate levels.
- Classification and Understandability: Transactions, events, balances, and other financial information have been appropriately categorized and presented in a clear and understandable manner for financial statement users.
- Completeness: The financial statements have fully reported all transactions, events, balances, and other financial data.
- Occurrence: Transactions, events, balances, and other financial records have occurred and are related to the entity.
An audit assertion is a management’s explicit or tacit declaration that the company’s financial statements accurately portray the company’s financial status. Management assertions are statements made by executives about certain characteristics of a company. If the auditor is unable to acquire a letter from a client’s top management providing management claims, the auditor is unlikely to continue with the audit.