Financial statement assertions and how auditors use them

In this lesson you will

List the assertions about classes of transactions and about account balances.
Explain why direction of testing matters for existence versus completeness.
Match an audit procedure to the assertion it addresses.

What an assertion is

AU-C 315.12 defines assertions as representations, explicit or otherwise, about the recognition, measurement, presentation and disclosure of information in the financial statements, inherent in management representing that the statements comply with the framework. When a balance sheet shows accounts receivable of $1.2 million, management is asserting that the receivables exist, belong to the entity, are complete, are valued correctly and are presented properly.

You use assertions to think about the different types of misstatement that could occur (AU-C 315.A217). A risk is never "receivables are risky." It is "receivables may be overstated because credits after year end reverse fictitious December sales," which is an existence and cutoff risk.

The assertion categories

AU-C 315.A219 groups assertions into two sets.

Classes of transactions and events, and related disclosures, for the period:

Occurrence: recorded transactions happened and pertain to the entity.
Completeness: all transactions that should be recorded are recorded.
Accuracy: amounts and data are recorded appropriately.
Cutoff: transactions are recorded in the correct period.
Classification: transactions are recorded in the proper accounts.
Presentation: transactions are aggregated or disaggregated appropriately and described clearly, and disclosures are relevant and understandable.

Account balances, and related disclosures, at period end:

Existence: assets, liabilities and equity interests exist.
Rights and obligations: the entity holds or controls the rights to assets, and liabilities are its obligations.
Completeness: all that should be recorded are recorded.
Accuracy, valuation and allocation: items are at appropriate amounts and adjustments are recorded.
Classification: items are in the proper accounts.
Presentation: items are aggregated, described and disclosed appropriately.

AU-C 315.A218 lets you express the assertions differently or combine the two sets, provided every aspect is covered. Many firms use a combined list.

Relevant assertions

An assertion is relevant when it has an identified risk of material misstatement, determined before considering controls (AU-C 315.12). A class of transactions, account balance or disclosure with one or more relevant assertions is significant. AU-C 315.33 requires you to determine the relevant assertions and the related significant classes, balances and disclosures. That determination drives AU-C 330.18: substantive procedures for each relevant assertion of each significant item, regardless of control risk.

Direction of testing

The assertion dictates where you start.

Existence or occurrence (overstatement): start from the recorded amount and vouch to evidence. Select from the receivables listing, then confirm or inspect subsequent receipts.
Completeness (understatement): start outside the records and trace in. Select from subsequent disbursements, receiving reports or vendor statements, then check that liabilities were recorded.

Selecting from the accounts payable listing cannot find a liability that is not on the listing. That mistake shows up often in files labeled "completeness of AP."

Some procedures cover several assertions. A receivable confirmation gives strong evidence of existence and some evidence on rights, but little on valuation, because a customer can confirm a balance it cannot pay. See the audit assertions guide for a full procedure map.

Common mistakes

Risk assessments that list "all assertions" for every account, which hides the real risks and inflates work.
Procedures labeled with assertions they do not address.
Disclosures with no assertion-level analysis.
Completeness tests run in the wrong direction.

Map each risk to a specific assertion in the RMM matrix by assertion.

Worked example

Matching procedures to assertions for payables

Blue Heron Marine Supply, Inc. reports accounts payable of $840,000 at December 31. The team identifies a risk that year-end invoices were held to improve the current ratio, a completeness risk. Performance materiality is $25,000.

The senior's draft procedure selects 25 vendors from the December 31 payables listing and agrees balances to statements. The manager rejects it: the procedure tests existence, not completeness.

The revised procedure starts with all January and February disbursements over $10,000, which total $1,310,000 across 46 payments. For each, the team inspects the invoice and receiving report to determine whether the goods or services were received by December 31. Results: 44 relate to January or later; 2 payments, $38,000 and $21,500, relate to December receipts and are not on the listing.

Unrecorded liabilities found: $38,000 + $21,500 = $59,500, above performance materiality. The team proposes an adjustment, expands the search window and reassesses control risk over the cutoff process.

Self-check

Answer each question before you open the answer.

When is an assertion relevant?
Show answer
When it has an identified risk of material misstatement: a reasonable possibility that a misstatement occurs and a reasonable possibility that it would be material. The determination is made before considering controls, on inherent risk alone (AU-C 315.12).
Why does selecting items from the payables listing fail as a completeness test?
Show answer
Completeness concerns items missing from the records. A sample drawn from the listing can only test items already recorded, so it addresses existence or accuracy, not completeness.
Which assertion does a positive receivable confirmation address most directly?
Show answer
Existence. It provides limited evidence on valuation, because a customer may confirm a balance it is unable to pay.
May a firm combine the transaction and balance assertions into one list?
Show answer
Yes. AU-C 315.A218 permits combining or expressing them differently, provided all aspects in AU-C 315.A219 are covered.

Sources

AICPA Statements on Auditing Standards, currently effective (AU-C sections)

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error