Financial statement assertions and audit evidence

Financial statement assertions and audit evidence are closely connected

concepts in the field of auditing. Financial statement assertions are claims or
representations made by management about the financial statements, while audit
evidence is the information and documentation that auditors gather and evaluate to
assess the validity of these assertions. Auditors use audit evidence to form an opinion
on the fairness and accuracy of the financial statements
Existence Assertion:

● Assertion: Assets, liabilities, and equity items exist.

● Audit Evidence: Auditors obtain physical verification, confirmations from third

parties, and examine documents like invoices, contracts, and bank statements to
confirm the existence of assets and liabilities.
Completeness Assertion:

● Assertion: All transactions and account balances that should be included are

included.

● Audit Evidence: Auditors examine records, trace transactions through the

accounting system, and review cutoff procedures to ensure that all relevant
transactions and balances are accounted for.
Accuracy and Valuation Assertion:

● Assertion: Amounts and valuations of assets, liabilities, and equity items are

accurate and fairly presented.

● Audit Evidence: Auditors perform substantive testing, including testing for

accuracy and valuation of items like inventory, accounts receivable, and

investments. They may use techniques like recalculation, reperformance, or
external valuations.
Rights and Obligations Assertion:

● Assertion: The entity has legal ownership or rights to assets and obligations are

properly disclosed.
 ● Audit Evidence: Auditors review contracts, agreements, and legal documents to

confirm ownership rights. They also examine loan agreements and other
contracts to assess the entity's obligations.
Occurrence Assertion:

● Assertion: Transactions recorded in the financial statements actually occurred.

● Audit Evidence: Auditors gather supporting documentation, such as invoices,

purchase orders, and shipping records, to verify the occurrence of recorded

transactions.
Cutoff Assertion:

● Assertion: Transactions are recorded in the correct accounting period.

● Audit Evidence: Auditors examine evidence related to the timing of

transactions, such as shipping documents, receiving reports, and sales invoices,

to ensure they are recorded in the appropriate period.
Classification and Understandability Assertion:

● Assertion: Transactions and account balances are properly classified and

presented in an understandable manner.

● Audit Evidence: Auditors review the financial statement presentation and

disclosures to ensure they conform to accounting standards and are clear and
comprehensible to users.
Quality And Quantity Of Audit Evidence
The quality and quantity of audit evidence are critical factors in the audit
process. Auditors must gather sufficient, appropriate, and high-quality audit evidence to
form a basis for their audit opinion on the financial statements. Let's delve into both
aspects:
Quality of Audit Evidence:
Quality refers to the reliability, relevance, and reliability of the audit evidence.
High-quality audit evidence is more credible and provides stronger support for the
auditor's conclusions.
 a. Relevance: Audit evidence should be directly related to the assertions being
tested. Relevant evidence supports the audit objectives and helps in drawing valid
conclusions.
b. Reliability: Reliable audit evidence is trustworthy and dependable. Factors
that enhance reliability include:

● Independence of the provider: Evidence from independent, third-party sources is

generally more reliable.

● Objectivity: Objective evidence is less subject to bias or manipulation.

● Consistency: Evidence that is consistent with other audit evidence is more

reliable.

● Timeliness: Evidence obtained close to the audit date is often more reliable than

older evidence.
c. Source: The source of audit evidence matters. External sources, such as bank
statements or confirmations from customers, are generally more reliable than internal
sources, such as internal memos.
d. Documentation: Well-documented evidence is more reliable. Proper
documentation ensures that the auditor can trace the evidence back to its source.
e. Auditor's Direct Knowledge: Evidence obtained through direct observation and
testing is often of higher quality than evidence obtained through inquiry or analytical
procedures.
Quantity of Audit Evidence:
Quantity refers to the sufficiency of audit evidence the amount of evidence
needed to draw reasonable conclusions about the financial statements.
a. Sufficiency: Audit evidence must be sufficient in quantity to support the
auditor's conclusions. If there is not enough evidence, the auditor may not be able to
provide reasonable assurance and may need to perform additional procedures.
b. Risk Assessment: The quantity of evidence needed depends on the assessed
risks of material misstatement. Higher risks may require more extensive testing.
c. Materiality: The materiality of an item or assertion also affects the quantity of
evidence needed. Material items require more extensive testing.
 d. Sampling: In practice, auditors often use statistical sampling techniques to
select a representative portion of transactions or account balances for testing. The
sample size is determined by factors like risk, materiality, and the desired level of
confidence.
Relevance and reliability of audit evidence
Relevance and reliability are two fundamental criteria that auditors use to assess
the quality of audit evidence. These criteria help auditors determine whether the
evidence they obtain is suitable for supporting their audit conclusions and forming an
opinion on the financial statements. Here's an explanation of each criterion:
Relevance of Audit Evidence:
Relevance pertains to the connection between the audit evidence and the specific
audit objective or assertion being tested. In other words, relevant evidence directly
addresses the issues under examination. Relevant evidence is important because it
supports the audit objectives and conclusions.
Key considerations for relevance include:
Connection to Assertions: Audit evidence should be directly related to the
assertions being tested. Assertions include assertions about existence, completeness,
valuation, rights and obligations, occurrence, and presentation and disclosure.
Materiality: Evidence should focus on material items or assertions. Materiality
is a key concept in auditing, and auditors concentrate their efforts on areas that have
the potential to materially impact the financial statements.
Corroboration: The evidence should corroborate or substantiate other audit
evidence. Multiple pieces of evidence that point to the same conclusion enhance the
relevance of the evidence.
Context: The evidence should consider the context of the financial statements
and the industry or sector in which the entity operates. What may be relevant for one
entity may not be for another.
Reliability of Audit Evidence:
Reliability refers to the credibility and trustworthiness of the audit evidence.
Reliable evidence is more likely to be free from error or bias and is, therefore, more
dependable for forming audit conclusions.
Factors that enhance the reliability of audit evidence include:
 Independence of Provider: Evidence from independent, third-party sources is
often more reliable because it is less likely to be influenced by the entity being audited.
Objectivity: Objective evidence is free from personal bias or subjectivity. For
example, bank statements are more objective than management's internal reports.
Consistency: Consistent evidence is less likely to be contradicted by other
information. Consistency across different pieces of evidence enhances reliability.
Source Reliability: The source of evidence matters. Evidence from sources with
a reputation for accuracy and integrity is more reliable.
Timeliness: Evidence obtained closer to the audit date is often more reliable
because it is less likely to be outdated or subject to subsequent changes.
Documentary Evidence: Well-documented evidence is more reliable because it
can be traced, reviewed, and verified.

Audit procedures
Audit procedures are the specific tasks and activities that auditors perform
during the audit engagement to obtain the necessary audit evidence and evaluate the
financial statements. These procedures are designed to assess the accuracy,
completeness, and reliability of an organization's financial records and disclosures.
Audit procedures can be broadly categorized into two main types: substantive
procedures and tests of controls.
Substantive Procedures:
Substantive procedures are audit tests and techniques performed to detect
material misstatements in the financial statements. These procedures are designed to
provide direct evidence about the financial statement assertions, including existence,
completeness, accuracy, valuation, rights and obligations, and presentation and
disclosure. Substantive procedures include:
a. Testing of Transactions:

⮚ Testing for Occurrence: Auditors examine supporting documents and

records to ensure that recorded transactions actually occurred.

⮚ Testing for Completeness: Auditors verify that all transactions that should

be recorded have been included in the financial statements.

 ⮚ Testing for Accuracy and Valuation: Auditors assess whether recorded

amounts are accurate and fairly valued.

b. Testing of Account Balances:
Testing for Existence: Auditors confirm the existence of assets and liabilities
directly through physical inspection, confirmations from third parties, or other audit
techniques.

⮚ Testing for Rights and Obligations: Auditors verify that the entity has legal

ownership or rights to assets and that liabilities are properly disclosed.

⮚ Testing for Completeness: Auditors assess whether all relevant account

balances have been included in the financial statements.

⮚ Testing for Valuation and Allocation: Auditors assess the accuracy and

fairness of the valuation of assets and liabilities.

c. Analytical Procedures: Auditors use financial and non-financial data analysis
to identify unusual or unexpected patterns, trends, or relationships that may indicate
potential misstatements.

d. Testing of Disclosures: Auditors review the notes to the financial statements

to ensure that they are complete and in accordance with accounting standards and
regulatory requirements.
Tests of Controls:
Tests of controls are audit procedures that evaluate the effectiveness of an
organization's internal controls over financial reporting. These procedures are used to
assess whether the internal controls are operating effectively to prevent or detect
material misstatements. Tests of controls include:
a. Inquiry and Observation: Auditors interview employees and observe control
procedures in action to assess their effectiveness.
b. Inspection of Documentation: Auditors review internal control documentation,
policies, and procedures to assess their design and implementation.
c. Reperformance: Auditors independently perform control procedures to
determine whether they achieve their intended purpose.
 d. Walkthroughs: Auditors trace a sample of transactions through the entire
process to assess whether controls are operating as designed.