Audit procedures and assertions - Importance of assertions

Learning Outcomes

After reading this article, you will be able to explain what audit assertions are, describe their importance in the audit process, and understand how auditors use audit procedures to test these assertions. You will also know how assertions link to obtaining audit evidence and forming opinions on financial statements, as required for the ACCA FAU exam.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the principles behind audit assertions and the procedures used to test them. You should revise the following syllabus areas covered in this article:

• The use and importance of assertions in auditing
• Assertions for different classes of transactions, account balances, and disclosures
• Types of audit procedures available to gather evidence
• The relationship between audit assertions, evidence, and the audit opinion
• Practical examples of applying assertions and designing relevant audit tests

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is an example of the 'completeness' assertion for account balances?
   1. Assets shown exist at year end
   2. All assets that should be recognised are recorded
   3. Assets are correctly valued
   4. Assets are adequately safeguarded

2. What is the primary reason for auditors using assertions in their work?

3. True or false? Checking whether sales recorded in the ledger are supported by delivery notes is a test of the occurrence assertion.

4. Name three types of audit evidence-gathering procedures.

Introduction

Audit assertions are the statements made by management, whether explicitly or implicitly, about various aspects of the financial statements. These assertions serve as the focal point for the auditor’s work, guiding which areas need testing and the type of evidence required. Understanding assertions is critical for designing effective audit procedures and addressing the correct objectives during the audit.

Key Term: assertion
A statement by management about the recognition, measurement, presentation, or disclosure of information in the financial statements.

THE ROLE OF ASSERTIONS IN AUDIT

Assertions classify what management is claiming about different elements of the financial statements. They help auditors determine what could go wrong and where material misstatements may occur. The use of assertions ensures that audit work is structured and all key risks are addressed.

Assertions are grouped based on what is being audited:

• Classes of transactions and events (e.g., sales, purchases)
• Account balances (e.g., inventory, receivables)
• Disclosures (e.g., significant accounting policies, commitments)

Auditors use assertions to design procedures that confirm or refute these management claims.

Key Term: audit procedure
An action or test performed by the auditor to obtain evidence about specific audit assertions.

TYPES OF ASSERTIONS

Assertions fall into several standard categories. The main assertions, as applicable to classes of transactions and account balances, are:

Assertions about classes of transactions and events

• Occurrence: Transactions recorded actually took place.
• Completeness: All transactions that should have been recorded are included.
• Accuracy: Transactions have been recorded at correct amounts.
• Cut-off: Transactions are recorded in the correct accounting period.
• Classification: Transactions are recorded in the correct accounts.
• Presentation: Transactions are appropriately described and disclosures are relevant.

Assertions about account balances

• Existence: Recorded assets, liabilities, and equity interests exist.
• Rights and obligations: The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
• Completeness: All assets, liabilities, and equity interests that should have been recorded are included.
• Accuracy, valuation and allocation: Amounts are included at appropriate amounts and allocated according to applicable standards.
• Classification and presentation: Balances are classified and presented as required.

Key Term: audit evidence
Information collected by the auditor to support conclusions on which the audit opinion is based.

LINKING ASSERTIONS TO AUDIT PROCEDURES

Audit work must be tailored to target specific assertions. The auditor identifies which assertions are at risk of material misstatement for each balance or transaction and designs audit procedures to test them.

For example:

• To test the existence of inventory, the auditor attends a physical inventory count.
• To test completeness of liabilities, the auditor reviews after-date payments to find unrecorded liabilities.
• For occurrence of sales, the auditor traces sales ledger entries back to delivery documents.

The quality of the audit opinion relies heavily on selecting the right procedures to gather evidence about the most relevant assertions.

Worked Example 1.1

An audit team is verifying the company's trade receivables. The financial statements show a large year-end balance.

Question: Which assertions are most relevant, and what audit procedures should the auditor perform?

Answer:
The most relevant assertions are existence (do the receivables exist at year end?) and valuation (can the company collect these amounts?). The audit team should perform external confirmations by writing to customers and review subsequent cash receipts. Reviewing old balances and assessing if a provision for doubtful debts is necessary addresses valuation.

Worked Example 1.2

You are auditing a company’s purchases for the year. The risk identified is that not all goods received have been recorded as purchases in the correct period.

Question: Which assertion is the auditor concerned with, and what audit procedure addresses this?

Answer:
The assertion at risk is completeness (all purchases are recorded), as well as cut-off (purchases are recorded in the correct period). The auditor should test purchases received just before and after year-end and agree the goods received notes to purchase invoices and accounting records.

CHOOSING THE RIGHT AUDIT PROCEDURES

Audit procedures fall into categories such as inspection, observation, inquiry, external confirmation, recalculation, and analytical procedures. The auditor must match the procedure to the assertion:

• Inspection: Examining invoices or contracts to support occurrence or rights.
• Observation: Watching physical counts for existence or completeness.
• Inquiry: Asking management about estimates, supporting valuation assertions.
• External confirmation: Confirming balances with third parties for existence and rights.
• Recalculation: Recomputing figures for accuracy.
• Analytical procedures: Comparing ratios or trends to identify potential misstatements.

Key Term: substantive procedure
An audit procedure designed to detect material misstatements at the assertion level.

THE IMPORTANCE OF ASSERTIONS FOR AUDIT QUALITY

Assertions ensure that audit work is comprehensive and focused on relevant risks. If the auditor ignores or misidentifies assertions, important misstatements could go undetected, leading to an incorrect audit opinion. Proper application of assertions allows auditors to justify their conclusions based on specific, targeted evidence.

Exam Warning

A frequent exam mistake is to equate "existence" and "completeness." Remember, existence checks if something recorded is real; completeness checks if all real items are recorded. Always match the audit procedure to the correct assertion.

Summary

Assertions provide the necessary structure for designing audit procedures and interpreting audit evidence. Understanding and applying assertions is essential for reaching a reliable audit conclusion and meeting professional standards.

Key Point Checklist

This article has covered the following key knowledge points:

• Define audit assertions and their purpose in the audit process
• List common assertions for transactions, balances, and disclosures
• Explain how assertions link to audit procedures
• Match suitable audit evidence-gathering techniques to specific assertions
• Discuss the risks of failing to address the correct assertions

Key Terms and Concepts

• assertion
• audit procedure
• audit evidence
• substantive procedure