Claims that establish whether or not financial statements are true and fairly represented in auditing Assertions are claims that establish whether or not financial statements are true and fairly represented in the process of auditing. Importance of AssertionsAssertions are an important aspect of auditing. Since financial statements cannot be held to a lie detector test to determine whether they are factual or not, other methods must be used to establish the truth of the financial statements. Assertions are defined as “a statement that is believed to be true by the speaker. “An assertion can be anything, e.g., “I assert that fundamental value investing is the best investing philosophy.” However, it is difficult to measure whether the statement is indeed true. Similarly, with financial statements, it is difficult to determine what financial information is free from material misstatement. There are two aspects to material misstatement. Clearly, materiality plays a large role; however, how to measure what information is true and fair or misstated is crucially important. Assertions play a key role in determining what is true and fair when auditing financial records. Assertions are characteristics that need to be tested to ensure that financial records and disclosures are correct and appropriate. If assertions are all met for relevant transactions or balances, financial statements are appropriately recorded. The International Financial Reporting Standards (IFRS) are a set of accounting standards issued by the International Accounting Standards Board (IASB) and the IFRS Foundation aimed towards providing a common set of accounting rules that are consistent, transparent, and comparable internationally. IFRS developed ISA315, which includes categories and examples of assertions that may be used to test financial records. There are two types of assertions, each of which relates to different events: 1. Transaction Level AssertionsTransaction level assertions are made in relation to classes of transactions, such as revenues, expenses, dividend payments, etc. There are five types of transaction-level assertions:
2. Account Balance AssertionsAccount balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity. There are four types of account balance assertions:
3. Presentation and Disclosure AssertionsIt is the third assertion type that can fall under both transaction-level assertions and account balance assertions. It relates to the presentation and disclosure of financial statements. There are four types of presentation and disclosure assertions:
Related Readings Thank you for reading CFI’s guide to Assertions in Auditing. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
Audit tends to be a process spread across numerous different aspects that need to be inculcated by the auditors in order to ensure that they are able to gain the required evidence. This involves testing various different assertions on a number of different grounds in order to get reasonable assurance on a number of grounds. In this regard, audit planning tends to play a very important role, primarily because of the fact that it helps auditors prioritize over which part of audit they should carry out first, and which should be conducted at a later stage. Auditing for revenue holds substantial value when it comes to auditing revenue, predominantly because of the reason that it tends to be the most crucial part that impacts the overall financials of the company. Therefore, auditing of revenue from the perspective of the company holds tantamount value, because it needs to be tested across a variety of assertions. Risks:Revenue Audit is often considered to be a high-risk process in the company, because of the fact that the inherent risk is mostly high when it comes to revenue. This is primarily because of the fact that there are several different complex transactions that are included in the revenue recognition process. Therefore, the main aim of the auditor is to reduce the risk associated with a material misstatement that might occur as a result of material misstatement in the financial statements. Risk of Material Misstatement is defined as the risk that the line items that are mentioned in the financial statement have a higher variation in comparison to their actual figures. In this regard, it is important to consider the fact that the risk existing in revenue audit pertains to the revenue figure being materially misstated to an extent that internal controls are unable to detect that particular risk. Further explanation of the risks associated with Revenue Audit is provided below: Inherent RiskInherent Risk in the process of revenue audit pertains to the exposure of revenue figures towards misstatement. In this case, the level of inherent risk is also contingent on the nature of the business, as well as the complexity of the transaction involved. An example of inherent risk in revenue would be recording scrap materials sold as general revenue of the company. Control RiskAs far as the Control Risk of revenue is concerned, it mainly results from the failure of the internal controls to detect the inherent risk. In this regard, revenue might be in a position to severely misstate the financial position of the company. Therefore, control risk tends to play a very important role when it comes to revenue. Therefore, the main role of the auditor when it comes to auditing revenue is to ensure that the assessment is undertaken in order to plan the subsequent part of the audit process in a clear manner. Followed by the assessment, they are supposed to draw audit procedures based on the assertions they need to test for when it comes to revenue. Assertions:The audit assertions that are used when testing for revenue are as follows:
See also What Are the Audit Processes? 7 Key Processes You Should Know Procedures:Audit Procedures for testing revenue include both, Test of Controls, as well as Substantive Tests. Both of them are given in detail below: Test of Controls:In the case of auditing revenue, Internal Controls play a very important role. This implies that in the case where internal controls are effectively present, it is assumed that the control risk is low. In other words, it means that the internal controls are effective in preventing, detecting, or correcting material misstatements that occur in the revenue account. Therefore, the audit procedures involve testing these controls to obtain sufficient audit evidence in order to support the given assessment. However, these tests are only performed in the case where the auditor wants to rely on the internal controls in order to reduce the inherent risk of material misstatement. In the case where the auditor does not want to rely on any internal controls, then audit procedures would solely rely on substantive tests. In this regard, the test of controls includes the following:
Furthermore, there are other few details that need to be included when it comes to auditing revenue. They include the following:
Substantive Audit Procedures for RevenueSubstantive Audit Procedures for Revenue include the following components: Further details of these are given below: 1) Substantive Analytical ProceduresSubstantive Analytical Procedures for Revenue mainly include inspection and observation by the auditors in order to inspect the changes in trends that have occurred in the previous years. For example, there is a need to ensure that there are no inconsistencies in the sales figures over the course of time. The actual occurrence of revenue should ideally be aligned with the actual figures. In the case where this does not happen, it gets important to follow this up with relevant tests for details. However, even if proper concrete evidence is obtained from substantive analytical procedures, the test of details is still required. 2) Test of Details for Revenue:In order to test details for revenue, audit procedures are designed around assertions. Example and description of test of details are given in the table below:
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