Financial Statement Assertions

The overall objectives of a financial statement audit are the expression of an opinion on whether the clients’ financial statements are presented fairly, in all material respects, in conformity with GAAP.

To meet this objective, it is customary in the audit to identify numerous specific audit objectives for each amount repeated in the financial statements.

These specific objectives are derived from the assertions made by management that are contained in the financial statements.

5 Different Financial Statement Assertions

Financial statement assertions are the set of information that the preparer of financial statements is providing to another party. Financial statements represent a very complex and interrelated set of assertions.

There are five different financial statement assertions that the auditors collect to justify every item in the financial statement.

5 Different Financial Statement Assertions

Financial statement assertions are classified into the following five:

  1. Existence

Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period.

The assertion on existence is made to check whether the specified assets and liabilities are present on the given date.

It is also required to check that the transactions that are recorded took place at the specified date.

To test these items of the financial statement, it is hot sufficient that only books are consulted which record the assets or the liabilities.

There should be proof of the existence of physical assets or liability. For checking existence help is also sought from outside.

  1. Completeness

Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are so included.

Checking completeness of a financial statement is to analyze whether all the transactions that are already given in the financial statement are correctly included.

To abide by the completeness assertion, the auditors prove with the help of sufficient evidence that all the recorded transactions deserve to be included.

This is further supported by an external document to provide evidence regarding the occurrence of the transaction.

  1. Valuation

Assertions about valuation or allocation deal with whether asset, liability, revenue and expense components have been included in the financial statements at appropriate amounts.

Valuation checks whether the different components of the financial statement have been included in the right proportion.

The components are assets, liabilities, expenses, and revenue. The auditor does this with the help of GAAP.

  1. Rights and Obligations

Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of die entity at a given date.

This is to check whether the assets that are included in the financial statement are the rights and the liabilities are the obligations of the company.

To ensure this, sometimes special purpose entities are created.

  1. Presentation and Disclosure

Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed.

This assertion is to ensure whether the items in the financial statements are classified in the right way.

It is important to check that the account balance is calculated as well as disclosed properly.

The following tabulation illustrates the derivation of specific audit objectives for cash based on the discussions of the categories of assertions above;

Assertion CategorySpecific Audit Objectives
Existence or occurrenceThe petty cash fond, undeposited, receipt, checking accounts, and other items reported as cash exists at the balance sheet date.

Reported cash includes all petty cash binds, undeposited receipts, and other cash on hand.

Reported cash includes all unrestricted bank balances

Rights and obligationAll items included in cash are owed by the entity at the foe balance sheet date.
Valuation or allocation

The items comprising cash have been correctly totaled.

Cash receipts and disbursements journals are mathematically correct mid have been properly posted to the general ledger.

Cash on hand has been correctly counted.

Checking account balances have been properly reconciled.

Presentation and disclosure

All items included in cash are unrestricted and the cash is available for operations.

Required disclosures such as compensating balance agreements have been made.

Final Words

In a financial audit, management assertions or financial statement assertions is the set of information that the preparer of financial statements (management) is providing to another party.

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