12.5 Financial statement assertions and audit evidence

Financial statement assertions are representations made by management regarding the recognition, measurement, presentation, and disclosure of items in the financial statements. These assertions provide a framework for auditors to evaluate and test the accuracy and completeness of the financial statements. There are several categories of financial statement assertions:

1. Existence or Occurrence:
   • This assertion states that the assets, liabilities, and equity interests included in the financial statements actually exist and the recorded transactions have occurred.
2. Completeness:
   • This assertion ensures that all transactions and events that should be recorded have been included in the financial statements and that no material information has been omitted.
3. Rights and Obligations:
   • This assertion confirms that the entity has legal ownership or control over its assets and the obligations reflected in the financial statements are valid and enforceable.
4. Valuation or Measurement:
   • This assertion relates to the accuracy and appropriateness of the values assigned to assets, liabilities, equity, revenues, and expenses in the financial statements.
5. Presentation and Disclosure:
   • This assertion focuses on the appropriate classification, description, and disclosure of information in the financial statements, including the adequacy of disclosures in the footnotes.

To assess the assertions, auditors gather and evaluate audit evidence. Audit evidence is the information obtained during the audit process that supports or contradicts the financial statement assertions. The type and source of audit evidence depend on the nature of the assertion and the audit procedures performed. Here are examples of audit evidence for each financial statement assertion:

1. Existence or Occurrence:
   • Inspection of physical assets, such as inventory or property.
   • Confirmations from external parties, such as banks or customers.
   • Examination of supporting documents, such as invoices or contracts.
2. Completeness:
   • Reconciliation of accounting records to external records, such as bank statements.
   • Examination of cutoff procedures to ensure transactions are recorded in the correct period.
   • Inquiry and analytical procedures to identify any significant gaps or missing information.
3. Rights and Obligations:
   • Examination of legal contracts and agreements.
   • Review of title deeds, loan agreements, or lease agreements.
   • Confirmation of balances or terms with external parties.
4. Valuation or Measurement:
   • Evaluation of supporting documentation for significant transactions or estimates.
   • Comparison of recorded amounts to industry benchmarks or external market data.
   • Use of valuation techniques, such as discounted cash flow analysis or appraisals.
5. Presentation and Disclosure:
   • Review of financial statement footnotes and disclosures for completeness and adequacy.
   • Comparison of financial statements to accounting standards and regulatory requirements.
   • Examination of internal controls over financial reporting related to presentation and disclosure.