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Understanding Audit Assertions: A Small Business Guide

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what are audit assertions

Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals.

It means the auditor should perform substantive procedures to respond to the high-risk assessments for each assertion. The risk assessment for valuation, existence, rights and obligations, completeness, and all other assertions are high.


    Using Information Produced by the Company

    Recalculation consists of checking the mathematical accuracy of documents or records. The reliability of information generated internally by the company is increased when the company’s controls over that information are effective. The timing of the audit procedure used to test the assertion or control. As the quality of the evidence increases, the need for additional corroborating evidence decreases. Obtaining more of the same type of audit evidence, however, cannot compensate for the poor quality of that evidence. Check the basis of depreciation calculation followed by the entity.

    • Often controls related to financial reporting extend beyond the immediate company to service organizations supporting its operations.
    • Completeness, like existence, may examine bank statements and other banking records to determine that all deposits that have been made for the current period have been recorded by management on a timely basis.
    • The FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles .
    • These tests are specific to the accounts and information systems in place at the company being audited.
    • While audit procedures do not provide absolute assurance, an audit is designed to provide readers of financial statements with reasonable assurance an entity’s financial statements fairly present its financial position in all material respects.
    • Each class of transactions may have its own level of evidence required for a given assertion so auditors must determine which documents or pieces of data are relevant to their work.

    Regardless, auditors need to make sure they address all possible areas of misstatement. Some auditors refer to auditing by assertions as an assertions audit. Regardless of the name, we need to know what the typical assertions are. 11/AU sec. 329, Substantive Analytical Procedures, establishes requirements on performing analytical procedures as substantive procedures. The auditor also might select specific items to obtain an understanding about matters such as the nature of the company or the nature of transactions. Reperformance involves the independent execution of procedures or controls that were originally performed by company personnel. The company can charge depreciation only in respect of assets owned by the entity.

    Assertions as Scoping Tool

    Therefore, these audit assertions tend to be important because they tend to provide effective proof regarding the authenticity and accuracy of the financial statements. Without these assertions in place, it is considerably harder for stakeholders to comprehend the financial statements.It is important because these assertions tend to add a much-needed layer of security when it comes to these audit assertions. Therefore, with these audit assertions in place, the reliability of financial statements considerably increases.

    Assets, liabilities and equity balances exist at the period end. Some of these include reviewing accounts and reconciliation of payables to supplier statements. Accrued ExpensesAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of audit assertions accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited. It refers to the fact that all the transactions have been recognized accurately at their correct amounts. For instance, any adjustments required have been correctly reconciled and accounted for in the statements.

    What is an Assertion? How Audit Assertions Relate to SOC Reports

    It 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.

    When financial statements are prepared, the preparer is asserting the fundamental accuracy of those statements. These assertions are then tested by auditors and CPAs to verify their accuracy. The concept of materiality allows the auditor to support the statement that a sufficient number of transactions–as opposed to all transactions–have been recorded. Testing to support completeness originates with externally generated documentation that a transaction has occurred. The presence of tangible assets in a retail client’s possession is evidence that the asset has been acquired. An invoice from a vendor and a receiving report from the warehouse supervisor or receiving clerk are examples of documents that are indicative that transactions have occurred and should be recorded.