9/10/2019 Audit Assertions - Guide of the Different Assertions in Auditing

What are Audit Assertions?

Audit assertions make up an important element in the di erent stages of
nancial statement audits. An auditor uses audit assertions and
procedures to perform tests on a company’s policies, guidelines or
internal controls, and nancial reporting processes. In nancial
statements, assertions about the recognition, measurement,
presentation, and disclosure of nancial information are included.

We know that nancial statements are derived from trial balances that
ultimately lead back to the general ledger, journals, and source
documents. Remember this owchart:

When going about an audit of the nancial statements, what would be

the logical approach? Should we audit each line item separately (i.e.,
cash, accounts receivable, inventory, revenue, expense, etc.) or is there a
more e cient way? In reality, individual line items are not audited
separately, and audits are divided into cycles.

Cycles are groups of similar accounts that a ect each other and thus,
audits are typically done using a cycles approach. Some examples of
cycles are the RRR (Revenues, Receivables, and Receipts) cycle and the
PPP (Purchases, Payables, and Payments) cycle. For example, a revenue
recognition not only credits the revenue account but also debits the
accounts receivable account. In addition, when the cash is collected from
the customer regarding that speci c sales entry, the cash account is
debited which also credits the account receivable account.

Management Assertions 

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Many people often think that the nancial statements are the auditor’s
responsibility. However, assembling the nancial statements is the
responsibility of the company management (i.e., the client) and
evaluating the nancial statements against an established criterion is the
auditor’s responsibility. Hence, when preparing nancial statements,
management makes assertions about each account and its related note
disclosures. Auditors then use these assertions for the account
balances, classes of transactions, and presentation and disclosures
in assessing the risk of material misstatement and designing audit
procedures. Assertions are directly related to GAAP.

The Di erent Assertions

As noted above, there are three general categories of assertions:

Account Balances – They are generally balance sheet accounts (at

the period end)
Classes of Transactions – They are generally income statement
accounts (for the period)
Presentation and Disclosure – How di erent accounts are
presented in the nancial statements (long-term asset vs current
asset or long-term liability vs current liability)

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Examples
 

Type of Speci c
Statement
Assertion Assertion

Uncollectible receivables have been Account Valuation

allowed for Balance

All leases have been fully included in Account Completeness

capital assets Balance
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Type of Speci c
Statement
Assertion Assertion

Inventory is physically present in the Account Existence

warehouse Balance

Sales revenue transactions include Class of Occurrence

actual shipments made to real Transaction
customers

Investment income has been properly Class of Classi cation

excluded from sales revenue Transaction

Obtain the last 5 receiving reports for Class of Cut-o

2016 and the rst 5 receiving reports for Transaction
2017 to ensure that the shipment has
been recorded in the proper period

Ask management whether any of the Account Rights

inventory is on a consignment basis Balance

Related Readings
We hope you have bene ted from reading CFI’s guide to audit assertion.
CFI o ers the Financial Analyst Certi cation Program for anyone seeking
to become a world-class nancial analyst.

Audited Financial Statements

Auditor’s Report
Forensic Audit Guide
CFI Financial Analyst Certi cation Program

Free Accounting Courses



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