Management Assertions - the assertions by management about the accuracy of the financial statement components. An auditor typically uses these assertions to help guide the type of audit evidence gathered. These assertions are:
Transactions
- Occurrence - The occurrence assertion relates to whether all recorded transactions have occurred and pertain to the entity. For example, management asserts that all revenue transactions recorded during the period were valid transactions. Occurrence is sometimes also referred to as validity
- Authorization - Authorization relates to whether all transactions have been property authorized. For example, the purchase of a material amount of plant and equipment should be approved by the board of directors. Authorization is important for routine transactions because it shows that proper controls are in place and are being followed, a good indicator of the business process as a whole.
- Accuracy - Accuracy relates to whether amounts and other data relating to recorded transactions and events have been recorded appropriately. GAAP establishes the appropriate method for record a transaction or event. For example, the amount recorded for the cost of a new machine includes its purchase price plus all reasonably costs to install it.
- Completeness
Relating to Transactions
Completeness relates to whether all transactions that occurred during the period have been recorded. For example, if a client fails to record a valid revenue transaction, the revenue account will be understated. The completeness assertion is more focused on expense and liability accounts.
Relating to Account Balances
Completeness addresses whether all assets, liabilities, and equity interests that should have been included as ending balances on the financial statements have been included. For example, management implicitly asserts that the ending balances shown for accounts payable on the balance sheet includes all such liabilities as of the balance sheet date.
Relating to Presentation and Disclosure
This assertion relates to whether all disclosures that should have been included in the financial statements have been included.
- Cutoff - Cutoff relates to whether transactions and events have been recorded in the correct accounting period. Audit procedures must ensure that transactions occurring near year-end are recorded in the financial statements in the proper period. For example, the auditor may want to test proper cutoff of revenue transactions at December 31. This can be done by examining a sample of shipping documents and sales invoices for a few days before and after year-end.
- Classification - Classification is concerned with whether transactions and events have been recorded in the proper accounts.
Account Balances
- Rights and Obligations - Rights and Obligations addresses the assertion of whether the entity holds or controls the rights to assets included on the financial statements, and that liabilities are obligations of the entity. For example, management asserts that the entity has legal title or rights of ownership to the inventory shows on the balance sheet (this idea is important for those who hold or store inventory on consignment.) - Existence - Existence addresses the assertion of whether ending balances of assets, liabilities, and equity interests included in the financial statements actually exist at the date of the financial statements. Auditors will often "vouch for existence" by starting from an ending balance of an account and finding the supporting transactions making up that balance.
- Completeness ^
- Valuation and Allocation - The Valuation and Allocation assertion addresses whether assets, liabilities, and equity interests included in the financial statements are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Discloures
- Occurence and Rights and Obligations - These assertions address whether disclosed events, transactions,