Definition of Audit Assertions
Audit assertions are the check points that the auditor needs to check regarding the implicit or explicit claims, in respect of any income, expense, asset or liability or any disclosure per se so as to comply with requirements of the applicable financial reporting framework (FRF), made by the management and such check may or may not have implications on the audit report (depending on the type of audit assignment).
Explanation
- “Assertion” means any forceful statement of fact or belief. Assertions are made by the management regarding the assets, liabilities, incomes, expenses, etc. Auditor needs to check the validity of those assertions. So, we say “audit assertions”.
- A simple question arises is “who has asked the auditor to check the same”? The auditing standards are applicable to the auditors. Those standards require the audit to comply with the requirements. Thus, auditor has ethical & professional duty to comply with the auditing standards.
- Let’s say that the balance sheet of the organisation has presented $ 250 million as “Plant & Machinery” on December 31, 2019. This means the following:
- Those plant & machineries exists at on that date (i.e. existence assertion).
- Management has some measurement basis to arrive at the value of $ 250 million (i.e. valuation assertion).
- The company owns & controls the entire plant & machinery.
- Company has all the rights & obligations in relations to the said plant & machinery (i.e. rights & obligation assertion).
- All existing plant & machineries are captured in the figure of $ 250 million (i.e. completeness assertion).
Audit Assertions for Investments
- Investments are the amounts allocated by the entity into some fixed deposits, mutual funds, systematic investment plans (SIP), corporate bonds, equities of another company, or any other instrument. Let’s say company has reported $ 160 million as “Investments” in the balance sheet on December, 2019. Auditor needs to check the following assertions to opine on the value as disclosed:
1. Existence
The investments should actually exist as on the said date. For these, the auditor needs to verify the backup documents which claims such investments have been made by the company. Thus, documentation helps here in ensuring the existence. Also, auditor may ask for third-party verification of balance as on the said date.
2. Accuracy
By accuracy, we mean to say that each investment is valued the under appropriate head with the broad heading of “investments”.
3. Valuation
Valuation assertion says that the value should be as per the relevant accounting framework. Few accounting standards also requires provision in case of unrealised loss. Thus, auditor needs to ensure that the value appearing on the face the balance sheet is appropriate.
4. Cut-Off
Cut-off means the end date by which the investments relates to a particular year. In our example, the cut-off date is December 31, 2019. Only the investment which are made till the last date, should be reflected as investments as on the said date.
5. Rights
Entity should have right to redeem the investments. This right is clearly mentioned in the agreement or contract or backup document of the investment.
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6. Presentation
The presentation should be made as the applicable financial reporting framework.
Audit Assertions Depreciation
Depreciation is a fixed charge on the property, plant & equipment of the entity. Depreciation is a non-cash expenditure. Since, no cash outflow is involved in the same, auditor needs to be alert for the allocation of the expense & calculation done. Say the company has presented $ 15 million as depreciation on the face of the statement of profit & loss. Thus, auditor needs to carry out assertions of profit & loss statement. Since, the accumulated depreciation till date is shown as reduction from the gross figure of “Property, plant & equipment”, auditor also needs to carry out balance sheet assertions in respect of the provision amount. The auditor needs to check the following assertions:
- Check whether the assets exists as on the said date. If no, then depreciation should not be charged after the asset is disposed of.
- Check the basis of depreciation calculation followed by the entity. This defines the valuation assertion.
- Check whether any expense is claimed as an asset which does not fit the criteria of capitalization. In that case, even depreciation should not be claimed. This defines the accuracy assertion.
- Ensure that cut-off procedures are applied in recognizing the fixed assets figures. Completeness of the accounting of property, plant & equipment, ultimately affects the completeness of a charge of depreciation.
- The company can charge depreciation only in respect of assets owned by the entity. This defines the obligations assertion.
- Check whether the presentation is appropriate as required by the applicable financial reporting framework.
Audit Assertions Balance Sheet
| Assertions | Explanation | Example |
| Existence | This ensures whether the same exists on that date. A physical verification report helps here. | Amount of property, plant & equipment compared to fixed assets register maintained by the company. Third-party verification of assets, can be helpful here. |
| Rights & obligations over the assets | There should be right to use those assets. Company should accept any obligation arising out of such assets. | Company holds inventory on the said date. In case company holds some goods as consignee, it should not be included in the figure of inventory. Also, company has to make provision for slow moving inventory. |
| Valuation | The valuation should be made as the applicable accounting standard. | Trade receivables should be held at realisable value. Thus, provision for bad & doubtful debts is made. |
| Completeness | Cut-off procedures are important to ensure all assets are reflected till end of the year. | There may be some inventory in transit at the end of the year, wherein the entity has rights & obligations on the inventory but the same is not physically received. Thus, we record such inventory as asset. |
| Classification | This ensure the assets, liabilities, incomes & expenses are not mis-classified. | Repairs to machinery may represent minor repair. If it is treated as fixed asset, it needs to be reclassified as expense. |
| Presentation | This should be in compliance with the applicable FRF. | Provision for slow moving inventory should be shown as reduction from inventory on assets side. Provision for bad & doubtful debts, should also be presented as reduction from Trade receivables. |
Why are Audit Assertions Important?
- Audit assertions ensure the authenticity of the figures presented on the face of financial statements as well as the appropriate of the disclosures made in the said financial statements.
- As a reader of financial statements, people are concerned whether the figures appearing in the financial statements are true and fair enough. This assurance is to be provided by an independent person known as an auditor.
- So as a part of the audit engagement, he needs to testify the assertions made by the management regarding the assets held by the company, liabilities accepted by the company, income recognised by the company, expenses incurred during the period & disclosures made in the financial statements.
- These assertions help the auditor to reduce the risk of material misstatement in the financial statements.
- Thus, the truth & fairness of the financial statements is justified with help of audit assertions.
Conclusion
Audit assertions is checking the claims made by the management. In case, the auditor finds that the claims are not appropriate, it has implications on the audit report of the entity. The extensive level of assurance gives more reasonable confidence to the auditor. The audit report is the main thing investors search for in the whole set of annual reports. Thus, audit assertions are the major test-checks for the auditor to opine whether the financial statements are free from material misstatement.
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