Companies periodically create their accounting records and financial statements, after a fiscal period to present a direct, precise, and comprehensive summary of their financial performance. The reports are crucial not just for corporate strategizing, but also for auditors, who depend on the businesses they assess to be accurate.
Ensuring that the assertions in the financial statements of the company are fair and objective will assist you in navigating audits more rapidly and easily, ensuring that you abide by the financial reporting regulatory frameworks, and present a detailed view of the firm’s financial wellbeing to the management, shareholders, and other interested parties.
What are Assertions?
Companies of all sizes and sorts, including multinational corporations to smaller firms to NGOs, create financial reports that they are required to set up and submit in the most comprehensive, precise, and timely manner possible when inspected. Large businesses, for instance, are legally required to have their financial accounts audited every year.
Accounting assertions, also called management assertions or financial statement assertions, are the declarations made by the company confirming that the financial statements provided are comprehensive and correct. They can be either explicit or implicit. Companies that form such assertions are avoiding the risk of material misstatements in their financial statements. These misstatements can be present if the firm fails to follow the appropriate accounting standards.
It implies that managers directly or indirectly asserts that perhaps the valuation, assets, revenue, expenditure, and income documented in financial statements has been accurately measured and disclosed in accordance with generally accepted auditing standards, whether this is supported by evidence. In most cases, audit assertions are utilized by independent auditors throughout an audit of a firm’s earnings reports.
For chartered accountants as well as other auditors to determine the validity of these statements, they must examine and evaluate several different parts of the financial data and reports. After collecting sufficient audit data to show that the business’s financial statements satisfy these requirements, the business may be certain that its representations are comprehensive, correct, and in accordance with generally accepted accounting regulations such as the IFRS.
The International Financial Reporting Standards (IFRS) are intended to offer a uniform, complete set of fair and internationally relevant corporate audit procedures.
IAS 35, a standard of IFRS, includes practices that are met when executing a financial statement audit to guarantee that they are following the correct tests of controls to create screening procedures for both the management controls and analytical testing along with verifying the accuracy and comprehensiveness of financial records registered for the fiscal period being inspected.
The public at large is obliged to hear assertions or declarations made by company leaders on certain areas of a company’s operations. Using these representations as a starting point, external auditors may develop and implement processes to verify the company’s assertions and establish a judgment, that they can then testify to the audience. For a company to be able to back up the claims made by its management team, a significant amount of effort must be put in. Sometimes, financial reporting rules extend further than the boundaries of the current corporation to include service companies that support the company’s activities.
Three Categories of Assertions
There are nine different types of audit assertions. To evaluate the nine distinct categories, it is helpful to organize them according to their roles as well as the information that is used to validate their truth and correctness. In general, you may divide these into three main classes, with certain overlapping between each of the categories:
Transaction Level Assertions
When evaluating transactions and journal entries, Transaction-Level Assertions are employed to ensure that the data is correct. There are five assertions included in this category, as mentioned below.
This assertion indicates that transactions or products have been categorized and documented in the appropriate accounts or classifications, respectively. For instance, salaries paid to office personnel are classed and reported as administrative expenditures, but payments made to products department employees are categorized and reported as a manufacturing cost. The debt is appropriately categorized as both current and non-current assets, according to accounting standards.
It implies that all financial transactions relating to the firm’s operations that were required to be documented are accounted for in the financial statements of the company. Examples include the cost of tangible and intangible materials, which are completely quantified and reflected in the financial statements. All the purchase orders that took place throughout the time are thoroughly documented in the accounting records of the company.
This claim indicates that all transactions have been reported in their period, or in the proper timeframe in some cases. Examples include material costs that are recorded in the financial statements and that are related to a particular accounting period. Alternatively, the activities are accurate during the period in which they happened. It essentially guarantees that the transactions reflected in the Financial Statements comprise of transactions that are solely related to the present financial year, as opposed to activities that are not. For instance, the HR department’s charges only contain those expenses that are related to the present fiscal year. Costs that have been spent in past years are not included in the present year’s salary expenditure.
This refers to the fact that the real number of transactions is completely documented and error-free. The worth of all expenses associated with the product, for instance, maybe precisely documented or estimated without any errors. The accuracy assertion relating to the integrity of transactions or balances at the time of publishing the financial statements is accepted to be equal to their real quantities or to be free of any substantial variances from their exact costs. Activities are examined, and the correctness of the reported entry is checked to see if the values are accurately entered before the next transaction is examined. In many situations, an auditor would examine individual consumer accounts, including purchases, to keep the right amount reported as paid corresponds to the actual amount provided by the clients.
According to this claim, all the reported transactions usually happen throughout the usual period of the contract. To assess whether the transactions shown on financial statements have occurred, the occurrence assertion must be satisfied. A variety of tasks can be performed, from confirming that a bank transfer has been performed to validating receivables balances by assessing whether a transaction occurred on the day.
This assertion is also utilized to determine whether the transactions that are recorded in the financial statements are connected to the entity in question. Examples include manufacturing costs incurred because of items built in the firm’s manufacturing department, which are recorded as a cost of goods sold in the financial accounts.
Presentation and Disclosure Assertions
These assertions are used for confirming that data is accurate, comprehensive, and in the appropriate sequence. Presentation and Disclosure assertions are divided into the five categories listed below.
All the financial data shown in the financial statements have been reported properly and at their respective amounts, according to the claims. For instance, the current balance of trade receivables has been correctly stated in the financial statements. Because it must be assured that all necessary entries have been correctly measured and officially recorded, accuracy regarding various accounting principles is, therefore, a crucial requirement.
This claim implies that all the transactions that have been reported have been undertaken for commercial objectives. To verify this assertion, auditors need to analyze if the reported values in the financial statements of the company have taken place.
This indicates that all transactions that are required to be declared in the financial statements have also been revealed in their entirety. The net result of all activities or current accounts should be reflected, and if there is something that could be of value to stakeholders, it should be fully reported. Completeness may be determined by reviewing bank statements and other financial information to ensure that all deposits made during the reporting period have already been documented by managers in a timely manner. Auditors could also check for transactions in the banks that have not yet been registered by the bank’s records department.
It refers to the fact that all the financial information contained in the financial statements has been appropriately categorized and organized in a manner that the reader can readily comprehend. The pattern and values presented in the financial statements must be easily understandable by the readers of these statements, including the stakeholders and investors.
Rights and Obligations
All the rights and obligations that have been revealed are connected to the reporting company. Roles and obligations assertions have been used to evaluate whether the assets, liabilities, and equity shown in the financial statements are indeed owned by the firm under audit. If a small company has been reviewed, the auditor may want verification that the cash amount in the checking account is the property of the company. Additional assets may also be examined by auditors to ascertain if they are in the ownership of the firm or are simply being utilized by it for its purposes. In addition to liabilities, auditors will look at the owner’s personal assets to ensure that any debts payable by the firm relate to the company rather than the individual.
Account Balance Assertions
Account Balance Assertions are utilized to evaluate the balances of assets and liabilities, as well as the sums of equity. These claims are subdivided into the four categories listed below.
Rights and Obligations
All the assets recognized on the balance sheet are owned by the organization, and all the liabilities reported on the balance sheet are obligations owed by the organization. According to this claim, inventories recorded on the balance sheet of a company are owned by the organization, but the balance of payables is a liability owed by the company.
This assertion states that at the conclusion of the term, the sums of assets, liabilities, and equity are still in place. For instance, inventories that have been recorded on the financial statement are still there at the end of the accounting period. A balance statement may show that there is $1000 in inventory levels, and the auditor’s responsibility is to determine whether there are any such inventories. When it comes to reviewing trade receivables amounts, the procedure is the same. It is the auditor’s responsibility to authenticate the trade receivables amount as stated using several methods, like selecting a specific receivables client and reviewing all relevant activities for that specific client. Bank deposits can also be checked for this assertion by examining the relevant bank statements, which are both available online. Auditors may also simply call the bank to obtain the most recent bank balance information.
In financial accounts, the amounts of assets, liabilities, and equity are all completely recognized in their respective categories. For instance, the whole inventory is valued, and nothing goes unexamined or unaccounted for.
The sums of assets, liabilities, and equity have also been recorded at the appropriate values for each asset, liability, and equity. To guarantee that all these items have been assessed correctly, the claim of valuation is presented. Overstating or understating anything in any income statement, or anywhere else for that reason, should be avoided at all costs. For example, inventory is valued at the lower of cost and NRV (net realizable value) when it is purchased from a supplier. This is an indication of a valuation, and the accountant must verify this assertion in evaluating the whole presentation of financial statements in its entirety.
In the three main categories of assertions, there is a significant degree of repetition; nevertheless, each assertion form is meant for a distinct element of the financial statements. The first type of assertions, i.e., transaction-level assertions are mostly correlated to the income statement of the company. It is related to the accuracy and fairness of the revenues and expenses recorded by the management. The assertions of presentation and disclosures are related to the fundamental reported values in the financial statements. However, the third category, audit balance assertions, form the claims regarding the balance sheet of the company. They assure that the assets, equity, and liabilities are recorded in the correct amounts and are fair. This shows that the three categories have similar assertions but are related to separate aspects of the financial statements of the company. These assertions are all equally important for the auditors to examine the compliance of the statements with the accounting regulations.
How can the Management Form these Assertions?
The management of a company should not be terrified or feel unpleasant by the regular audits of the company’s data. It must take the opportunity to get acquainted with the many kinds of audit assertions as well as how the analysis methods used to verify them contribute to the establishment of the honest presentation of a company’s financial status and performance. As a result, the management will be well-prepared to confront the analytical procedures with financial data that is accurate, full, and reliable if it follows these steps. Participants will also have a comprehensive knowledge of what is going on, and the staff will have valuable and reliable information on which they can count for successful financial analysis and policymaking in the future. This shows that forming the assertions is not only beneficial for the auditors, but also for the management and employees of the company. All the parties related to the company gain relevant information from these assertions and use them to their benefit.
Importance of Assertions
The validity of statistics presented in the financial statements as well as the appropriateness of information disclosed in those financial statements is ensured by audit assertions. If you are a user of financial information, you may be worried as to whether the statistics that are present in the financial statements are objective and truthful. Therefore, these assertions provide the guarantee that financial statements are free of any misstatements.
This reassurance is to be supplied by a third party, known as an auditor, who is independent of the company. He must, therefore, as part of the audit procedures, attest to the assertions made by the company relating to the resources owned by a company, the debts recognized by that firm, the earnings acknowledged by that company, the expenditures made by that company over a period, and data presented in the financial reports at the year-end. All these claims assist the auditor in lowering the likelihood of a substantial misrepresentation in the financial statements. As a result, audit claims are used to support the accuracy and reliability of financial statements.
The auditor would be unable to continue with the audit operations if the management fails to provide the assertions. A justification for delaying the start of an audit is the possibility that the failure to acquire the audit assertions document is an indication that management acted illegally in the preparation of the financial statements, which would invalidate the audits. Therefore, these assertions given by the management of the company to the auditor depict their confidence and fairness in forming the financial statements without committing any fraud or forming a misstatement.