Question

There are three categories of management assertions.  Each category includes assertions related to that specific category of management assertions.  Explain which assertion you deem to be the most important and thus should be the primary focus to auditors when performing the audit.  Also explain which management assertion you deem to be the least crucial.

Answer 1

The auditors rely upon a variety of assertions regarding the business. Management assertions are implicit or explicit claims made by management regarding the recognition, measurement and presentation of assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable financial reporting framework. They are also know as finanacial statement assertions. There are three categories of management assertions. They are:

1. Transaction Level Assertions
2. Account Balance Assertions
3. Presentation and Disclosure Assertions

Transaction Level Assertions:

These assertions may be further classified into the following five items:

• Completeness: All business transactions that are required to be recorded must be recorded. For example, all the purchase and sales transactions has to be recorded.
• Accuracy: It means that the actual value of transactions is fully recorded without any error. It means that a transaction must not be understated or overstated.The full amounts of all transactions should be recorded.
• Classification: This assertion means that transactions should be classified under proper accounts. For example, salaries of office staff are recorded as an administrative expense while wages related to the product department are recorded as a production expense.
• Occurrence: Transactions are recognized in the financial statements in which they have occurred and it must relate to the entity. For example, Salaries has been incurred during the period in respect of the employees employed by the entity
• Cut-Off: This assertion means that all the transactions are recorded in their respective periods. For example, the office expenses recognized in the financial statements relate to the current accounting period.

Account Balance Assertions:

These assertions are classified in the following four items

• Rights and obligations: This means that recongised assets in the balance sheet are owned by the entity and recognised liabilities are the obligations of the entity.For example, this assertion means that the Land recognized in the entity’s balance sheet is owned by the entity while the balance of sundry creditors is an obligation on the entity.
• Existence:Assets, liabilities and equity balances exist at the period end.For example, inventory recognized in the balance sheet exists at the end of the period.
• Completeness: Balances of assets, liabilities, and equity are recognized fully in the financial statements. For example, the value of all the inventory is recognized.
• Valuation: Balances of assets, liabilities, and equity have been recorded at their proper valuations. For example, the value of inventory is recognized at cost or net realizable value whichever is lower.

Presentation and Disclosure Assertions:

These assertions are classified in the following four items

• Accuracy: The assertions is that all the financial information included in the financial statements are disclosed accurately at their proper amount. For example, Sundry debtors has been accurately disclosed.
• Occurrence:The assertion is that disclosed transactions have actually occurred. For example, Transactions with related parties disclosed in the notes of financial statements have occurred during the period and relate to the entity.
• Completeness: This means that all the transactions required to be disclosed in the financial statements have been disclosed completely. For example, all related party transactions that should have been disclosed have been disclosed in the notes of financial statements.
• Understandability: This means that all the financial information in the financial statements are classified and presented properly so that it is clearly understandable.

The use of above assertions forms a critical element in the various stages of a financial statement audit.These assertions are assessed to find out the nature,timing and extent of audit.According to my opinion all the three categories of assertions are equally important.First set of assertion is related to the income statement, the second set to the balance sheet, and the third set to the accompanying disclosures. Income statement,balance sheet and notes are equally important. Auditor has to check whether the whole financial statements are free from material misstatement.Auditor cannot avoid checking any of these assertions because they are part of financial statement.Therefore all the categories are equally important. They are assessed to find out risk of material misstatements and are  necessary to obtain sufficient and appropriate audit evidence in response to those assessed risks. The consideration of management assertions during the various stages of audit helps to reduce the audit risk.If the auditor is unable to obtain sufficient and appropriate audit evidence,he shall modify the report.