Question

What does the term “management’s financial statement assertions” mean in relation to an audit? What are the different types of assertions and what is being asserted? Why is it necessary to understand the assertions when auditing?

Answer 1

Management while presenting financial statements explicitly or implicitly make assertions regarding various things in financial statements which mean if a thing is presented in financial statements it implicitly says(asserts some thing )

Let us discuss with an example

Management has given this item in balance sheet

Fixed assets 10000

Less accumulated depreciation (5000)

Fixed assets 5000

The following assertions can be drawn

Business owns fixed assets

Historical cost or acquisition cost is 10000

Assets are utilised in business

It is important to understand assertions while auditing because it is helpful in identifying potential misstatements in financial statements and we can plan the audit (risk assertions)

different types of assertions

about transactions and events(like normal transaction like sale payment of rent etc)

things asserted

Completeness accuracy cutoff classification occurance

about account balance( like fixed assets balance debtors balance etc)

Things asserted

Existence completeness valuation rights obligations

assertions in presention and disclosure

things asserted

Occurance classifications and understandability valuation and accuracy