12.1 Financial statement assertions and audit evidence

Financial statement assertions are the representations made by management in the financial statements. These assertions serve as the criteria against which auditors evaluate the accuracy, completeness, and validity of the financial information. Audit evidence is the information and supporting documentation obtained by auditors to substantiate these assertions. Here are the common financial statement assertions and their corresponding types of audit evidence:

1. Existence or Occurrence:
   • Assertion: The reported assets, liabilities, and transactions exist and actually occurred.
   • Audit Evidence: Inspection of physical assets, examination of supporting documents such as invoices, purchase orders, and bank statements, and confirmation from third parties.
2. Completeness:
   • Assertion: All relevant transactions and information are included in the financial statements.
   • Audit Evidence: Tracing transactions from the source documents to the financial statements, examining internal control processes, performing analytical procedures, and reviewing cutoff procedures.
3. Valuation or Measurement:
   • Assertion: The amounts and valuations reported in the financial statements are accurate and in accordance with applicable accounting standards.
   • Audit Evidence: Inspecting supporting documentation, such as appraisals, market prices, valuation models, and third-party confirmations, testing the mathematical accuracy of calculations, and evaluating management’s accounting estimates and judgments.
4. Rights and Obligations:
   • Assertion: The reported assets are owned or controlled by the entity, and the reported liabilities are the entity’s obligations.
   • Audit Evidence: Examining legal agreements, title deeds, loan agreements, leases, and other contracts, and performing procedures to verify the legal ownership and control of assets and the validity of liabilities.
5. Presentation and Disclosure:
   • Assertion: The financial statements are presented fairly and in accordance with applicable accounting standards, and all required disclosures are adequately disclosed.
   • Audit Evidence: Reviewing the financial statements for proper classification, disclosure, and compliance with accounting standards, comparing disclosures to industry norms and regulatory requirements, and evaluating the adequacy of related disclosures.