5.1 Audit assertions and how to identify the relevant assertions during the audit process

Audit assertions, also known as management assertions, are statements made by management regarding the financial statements. They represent management’s explicit or implicit claims about the various aspects of the financial statements. Auditors evaluate these assertions to assess the risk of material misstatement and design appropriate audit procedures. The generally recognized audit assertions include:

1. Existence or Occurrence: This assertion relates to whether the assets, liabilities, and transactions reflected in the financial statements actually exist and have occurred during the audit period. Auditors seek evidence to confirm that the recorded transactions are valid and that the reported assets and liabilities are real.
2. Completeness: This assertion pertains to whether all transactions, assets, liabilities, and disclosures that should be included in the financial statements have been recorded. Auditors examine supporting documentation and perform procedures to verify that there are no material omissions or exclusions.
3. Rights and Obligations: This assertion focuses on whether the entity has legal ownership or rights to the assets reported on the financial statements and whether the reported liabilities are obligations of the entity. Auditors may review contracts, agreements, and other legal documents to confirm the entity’s rights and obligations.
4. Valuation or Measurement: This assertion concerns the appropriate valuation or measurement of assets, liabilities, revenue, expenses, and other financial statement elements. Auditors assess whether the accounting policies used by management are in accordance with the applicable financial reporting framework and whether they have been consistently applied.
5. Presentation and Disclosure: This assertion involves the appropriate presentation and disclosure of information in the financial statements. Auditors evaluate whether the financial statements are properly structured, classified, and labeled, and whether the disclosures are sufficient, relevant, and understandable.

During the audit process, auditors identify the relevant assertions through various procedures, including:

1. Risk Assessment: Auditors assess the entity’s risks and identify areas with a higher risk of material misstatement. These risks help determine which assertions are more likely to be at risk.
2. Analytical Procedures: Auditors perform analytical procedures to evaluate relationships and trends in financial data. Significant deviations or anomalies may indicate potential misstatements and help identify relevant assertions.
3. Substantive Testing: Auditors conduct substantive testing procedures, such as detailed testing of transactions, account balances, or disclosures. These procedures provide evidence to support or challenge the assertions made by management.
4. Inquiry and Observation: Auditors interview management, obtain explanations, and observe processes to understand how management asserts control over financial statement elements.
5. Documentation Review: Auditors review supporting documentation, such as contracts, invoices, bank statements, and other relevant records, to identify assertions made by management and evaluate their reasonableness.