Audit Assertions: Everything You Need to Know

Definition of Audit Assertions

The audit process is inevitably a very important process during the financial year of the company. It is considered to be crucial from the perspective of the stakeholders, as well as for internal validation of the company, that everything is up to the mark. Year-end audits are time-consuming and cumbersome in nature, and therefore it requires the auditor to ensure that proper planning is undertaken in order to ensure that the process is executed in a smooth manner. The process of audit planning comprises a couple of different processes. Audit assertions form to be the basis of the entire audit planning and procedural phase.

As far as audit assertions are concerned, they can simply be defined as claims that establish whether the financial statements are fairly represented in the process of accounting or not.

Audit assertions are the implicit (or explicit) claims that are made by the management in order to depict that the financial statements have been prepared keeping in mind the appropriateness of the audit assertions.

Explanation of Audit Assertions

When financial statements are being prepared, there are certain elements that need to be borne in mind by the accountants. The preparation itself requires certain claims that need to make pertaining to the preparation of financial statements.

Since these claims and characteristics need to be tested, it is important to have a clear understanding of these assertions. These are assertions are characteristics that need to be tested in order to ensure that financial records and disclosures are correct and appropriately mentioned.

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There are two main type of assertions which are used in the audit process. They are referred to as transaction level assertions, and account balance assertions.

What are Audit Assertions?

As mentioned earlier, it can be seen that audit assertions are broadly classified into three broad categories Transaction Level Assertions, Account Balance Assertions, and Presentation Assertions. These are further explained in detail below:

Transaction Level Assertions

Transaction Level Assertions are made in relation to the classes of transactions. During a normal course of business, there are several different transactions that take place. They include revenues, expenses as well as dividend payments. There are five main classes of transaction-level assertions that are as follows:

Audit AssertionExplanation
Occurrence        Transactions that are generally recognized in the financial records are supposed to be recorded only if they have occurred in actuality. This implies that a transaction should only be recorded if it has actually occurred. Fake transactions or transactions that have no proof cannot and should not be recorded by accountants.  
CompletenessThe audit assertion of completeness implies that all the records that are already mentioned on the financials should be included as full and final settlements. This means, that accountants are supposed to ensure that all the transactions that are mentioned on the balance sheet are complete, in terms of the amounts and totals. This means that no transactions should be not mentioned in the respective class of accounts.
AccuracyAll transactions should be recorded with complete accuracy. This accuracy pertains to the disclosed amounts, as well as the incidence of those particular transactions. Accountants are supposed to ensure that all the transactions are accurately recorded so that there is no room for error. For example, all rounding off should be in accordance with agreed-upon principles.
Cut-OffRecording transactions in the correct accounting period is also a very important aspect that needs to be considered. This is primarily because of the fact that cut-offs need to be maintained so that there is proper clarity regarding the profitability in a particular period. In this case, there is a need to ensure that all the transactions follow the matching principle, and revenues and expenses are recorded for the specific year only for which the transactions are being made.
ClassificationClassification of accounts into their proper accounting heads tends to be an increasingly important objective. Accountants are supposed to make sure of the fact that all the transactions are properly recorded in the accounting heads where they actually belong. This implies that all expenses should be mentioned as expenses, whereas all revenues should be classified as such. In the same manner, capital expenditures and operating expenditures should also be categorized properly.  

Account Balance Assertions

Account Balance Assertions mostly apply to balance sheet items, which include assets, liabilities, as well as shareholder’s equity. There are four main types of account balance assertions that need to be incorporated for:

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Audit AssertionExplanation
Existence        All the line items that are mentioned on the balance sheet are supposed to exist during the said timeline. This means that they should ideally exist with the possession of the company. Accountants claim that when a balance sheet is prepared, all the line items that are present on the balance sheet should actually exist with the company.  
CompletenessAll the balance sheet items that are mentioned on the balance sheet are disclosed in completeness. They are completely recognized, and subsequently, they are completely disclosed on the balance sheet.
Rights and ObligationsThis implies that the entity has ownership rights or the right to benefit from the recognized assets on the financial statements. For all the assets that are mentioned on the balance sheet, the assertion is such that all assets are owned by the company, and the organization has subsequent rights to get benefits from the assets owned by the accountants.  
ValuationThe assets, liabilities and all the relevant equity has been valued in accordance with accounting principles. This implies that all assets, liabilities and equity represent correct amounts for all the accounts. For example, inventory should be valued at lower of cost of net realizable value. This assertion is implied when valuing inventory in the overall system.

Presentation and Disclosure Assertions

This particular audit assertion overlaps the two audit assertions mentioned above. Therefore, it talks about the presentation as well as disclosure of financial statements. Presentation and disclosure assertions are classified into four broad categories. They are as follows:

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Audit AssertionExplanation
Accuracy and valuation      Transactions, balances, as well as other financial records that have been disclosed accurately as well as for appropriate valuations. It is important to disclose all information that is presented with accuracy in terms of valuation.  
Classification and UnderstandabilityAll the transactions should be mentioned in their complete state.
CompletenessAll the transactions should be mentioned in their complete state.
OccurrenceAll the transactions that are mentioned should be occurred in the financial statements.  

Importance of Audit Assertions

Audit assertions are classified as one of the primitive aspects of auditing. They form the basis for characterizing the said transactions to be true in terms of existence. Since external stakeholders predominantly rely on financial statements to gauge the efficacy of the said organization. Therefore, these audit assertions tend to be important because they tend to provide effective proof regarding the authenticity and accuracy of the financial statements. Without these assertions in place, it is considerably harder for stakeholders to comprehend the financial statements.

It is important because these assertions tend to add a much-needed layer of security when it comes to these audit assertions. Therefore, with these audit assertions in place, the reliability of financial statements considerably increases. It also gets easier on the part of auditors because they know that the accountants have prepared these statements bearing in mind the above-mentioned clauses. Therefore, this holds tantamount importance from the point of view of not only the auditor but also from the general users of financial statements.