AUDIT ASSERTIONS (ISA 500)

Definition

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.

Audit Assertions are also known as Management Assertions and Financial Statement Assertions.

Explanation

In preparing financial statements, management is making implicit or explicit claims (i.e.

assertions) regarding the recognition, measurement and presentation of assets, liabilities, equity,
income, expenses and disclosures in accordance with the applicable financial reporting framework
(e.g. IFRS).

For example, if a statement of financial position of an entity shows buildings with carrying
amount of TZS. 100 million, the auditor shall assume that the management has claimed that:

 The buildings recognized in statement of financial position exist at the period end;

 The entity owns or controls those buildings;

 The buildings are valued accurately in accordance with the measurement basis;

 All buildings owned and controlled by the entity are included within the carrying amount
of TZS. 100 million.

Types & Examples

Assertions may be classified into the following types:

Assertions relating to classes of transactions

Assertions Explanation Examples: Salaries & Wages Cost

Occurrence Transactions recognized in the
financial statements have occurred
and relate to the entity.
Salaries & wages expense has been
incurred during the period in respect
of the personnel employed by the
entity. Salaries and wages expense
does not include the payroll cost of
any unauthorized personnel.

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Completeness All transactions that were supposed Salaries and wages cost in respect of
to be recorded have been recognized all personnel have been fully
in the financial statements. accounted for.

Accuracy Transactions have been recorded Salaries and wages cost has been
accurately at their appropriate calculated accurately. Any
amounts. adjustments such as tax deduction at
source have been correctly
reconciled and accounted for.

Cut-off Transactions have been recognized
in the correct accounting periods.
Salaries and wages cost recognized
during the period relates to the
current accounting period. Any
accrued and prepaid expenses have
been accounted for correctly in the
financial statements.

Classification Transactions have been classified Salaries and wages cost has been
and presented fairly in the financial fairly allocated between:
statements. -Operating expenses incurred in
production activities;
-General and administrative
expenses; and
-Cost of personnel relating to any
self-constructed assets other than
inventory.

Assertions relating to assets, liabilities and equity balances at the period end

Assertions Explanation Examples: Inventory balance

Existence Assets, liabilities and equity balances Inventory recognized in the

exist at the period end. balance sheet exists at the
period end.

Completeness All assets, liabilities and equity All inventory units that should
balances that were supposed to be have been recorded have been

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 recorded have been recognized in the
financial statements.
recognized in the financial
statements. Any inventory held
by a third party on behalf of the
audit entity has been included
in the inventory balance.

Rights & Obligations Entity has the right to ownership or
use of the recognized assets, and the
liabilities recognized in the financial
statements represent the obligations of
the entity.
Audit entity owns or controls
the inventory recognized in the
financial statements. Any
inventory held by the audit
entity on account of another
entity has not been recognized
as part of inventory of the audit
entity.

Valuation Assets, liabilities and equity balances
have been valued appropriately.
Inventory has been recognized
at the lower of cost and net
realizable value in accordance
with IAS 2 Inventories. Any
costs that could not be
reasonably allocated to the cost
of production (e.g. general and
administrative costs) and any
abnormal wastage has been
excluded from the cost of
inventory. An acceptable
valuation basis has been used to
value inventory cost at the
period end (e.g. FIFO, LIFO,
etc.)

Assertions relating to presentation and disclosures

Assertions Explanation Examples: Related Party

Disclosures

Occurrence Transactions and events Transactions with related

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 disclosed in the financial parties disclosed in the notes
statements have occurred and of financial statements have
relate to the entity. occurred during the period
and relate to the audit entity.

Completeness All transactions, balances, All related parties, related

events and other matters that
should have been disclosed
have been disclosed in the
financial statements.
party transactions and
balances that should have
been disclosed have been
disclosed in the notes of
financial statements.

Classification & Disclosed events, The nature of related party

Understandability transactions, balances and
other financial matters have
been classified appropriately
and presented clearly in a
manner that promotes the
understandability of
information contained in the
financial statements.
transactions, balances and
events has been clearly
disclosed in the notes of
financial statements. Users
of the financial statements
can clearly determine the
financial statement captions
affected by the related party
transactions and balances
and can easily ascertain their
financial effect.

Accuracy & Valuation Transactions, events, Related party transactions,

balances and other financial balances and events have
matters have been disclosed been disclosed accurately at
accurately at their their appropriate amounts.
appropriate amounts.

Use and Application

Auditors are required by ISAs to obtain sufficient & appropriate audit evidence in respect of all
material financial statement assertions. The use of assertions therefore forms a critical element in
the various stages of a financial statement audit as described below.

Stage of
Application of Assertions
Audit

Planning As part of the risk assessment procedures, auditors are required to understand the

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 entity and its environment including the assessment of the risk of material
misstatement (ROMM) due to fraud and error at the financial statement and
assertion level. (ISA 315.3)

The assessment of ROMM at the financial statement and assertion level provides
the basis for determining the nature, timing and extent of audit procedures that
are necessary to obtain sufficient and appropriate audit evidence in response to
those assessed risks.

Testing Substantive tests are performed to identify material misstatements at the

assertion level. In case of assertions whose ROMM has been assessed as
significant and no tests of control are planned to be performed, the substantive
procedures should include tests of detail (i.e. substantive analytical procedures
alone cannot be considered as sufficient and appropriate audit evidence for
assertions with a significant risk of material misstatement. (ISA 330.21)

Tests of control (TOCs) are performed to assess the operating effectiveness of

controls at the financial statement and assertion level. TOCs are necessary to
validate the auditor's expectation of the operating effectiveness of controls (as
acquired from the risk assessment procedures performed at the planning stage)
and also in case where the performance of substantive procedures alone cannot
provide sufficient and appropriate audit evidence in respect of a specific
assertion. (ISA 330.8)

Completion Auditor shall conclude whether sufficient and appropriate audit evidence has
been obtained for all material financial statement assertions taking into account
any revisions in the assessment of ROMM at the assertion level. (ISA 330.25-6)

Where an auditor is unable to obtain sufficient and appropriate audit evidence in

respect of a material financial statement assertion, he is required to modify the
audit report accordingly. (ISA 330.27)

Purpose & Importance

Assertions assist auditors in considering a wide range of issues that are relevant to the authenticity
of financial statements. The consideration of management assertions during the various stages of
audit helps to reduce the audit risk.