Audit is an assertion-based assurance engagement because the auditor uses assertions

to form a basis for the assessment of risks of material misstatement and the design and
performance of further audit procedures. In other words, in preparing financial
statements, management is making implicit or explicit claims (i.e. assertions)
regarding the recognition, measurement and presentation
of assets, liabilities, equity, income, expenses and disclosures in accordance with the
applicable financial reporting framework. The auditor performs audit procedures in
response to the different assertions (classes of transactions, account balances and
presentation and disclosures) of the management. An audit evidence, which are
sufficient and appropriate will be gathered by the auditor in the performance of each
of the audit procedures. The auditor will issue it's audit opinion based on the gathered
evidence.

Assertions in the Audit of Financial Statements

Definition

Audit Assertions are the implicit or explicit claims and representations made by the
management responsible for the preparation of financial statements regarding the
appropriateness of the various elements of financial statements and disclosures.

Audit Assertions are also known as Management Assertions and Financial Statement
Assertions.

Explanation

In preparing financial statements, management is making implicit or explicit claims

(i.e. assertions) regarding the recognition, measurement and presentation
of assets, liabilities, equity, income, expenses and disclosures in accordance with the
applicable financial reporting framework (e.g. IFRS).

For example, if a balance sheet of an entity shows buildings with carrying amount of
$10 million, the auditor shall assume that the management has claimed that:

 The buildings recognized in the balance sheet exist at the period end;
 The entity owns or controls those buildings;
 The buildings are valued accurately in accordance with the measurement
basis;
 All buildings owned and controlled by the entity are included within the
carrying amount of $10 million.

Types & Examples

Assertions may be classified into the following types:

Assertions relating to classes of transactions

Assertions Explanation Examples: Salaries & Wages Cost
Transactions Salaries & wages expense has been incurred
Occurrence
recognized in the during the period in respect of the personnel
 financial statements employed by the entity. Salaries and wages
have occurred and expense does not include the payroll cost of
relate to the entity. any unauthorized personnel.
All transactions that
were supposed to be
Salaries and wages cost in respect of all
Completeness recorded have been
personnel have been fully accounted for.
recognized in the
financial statements.
Transactions have been Salaries and wages cost has been calculated
recorded accurately at accurately. Any adjustments such as tax
Accuracy
their appropriate deduction at source have been correctly
amounts. reconciled and accounted for.
Salaries and wages cost recognized during the
Transactions have been
period relates to the current accounting period.
recognized in the
Cut-off Any accrued and prepaid expenses have been
correct accounting
accounted for correctly in the financial
periods.
statements.
Salaries and wages cost has been fairly
allocated between:
Transactions have been
-Operating expenses incurred in production
classified and presented
Classification activities;
fairly in the financial
-General and administrative expenses; and
statements.
-Cost of personnel relating to any
self-constructed assets other than inventory.

Assertions relating to assets, liabilities and equity balances at the period end
Assertions Explanation Examples: Inventory balance
Assets, liabilities and
Inventory recognized in the balance sheet
Existence equity balances exist at
exists at the period end.
the period end.
All assets, liabilities
All inventory units that should have been
and equity balances
recorded have been recognized in the financial
that were supposed to
Completeness statements. Any inventory held by a third
be recorded have been
party on behalf of the audit entity has been
recognized in the
included in the inventory balance.
financial statements.
Entity has the right to
ownership or use of the
recognized assets, and Audit entity owns or controls the inventory
the liabilities recognized in the financial statements. Any
Rights &
recognized in the inventory held by the audit entity on account
Obligations
financial statements of another entity has not been recognized as
represent the part of inventory of the audit entity.
obligations of the
entity.
Assets, liabilities and Inventory has been recognized at the lower of
Valuation equity balances have cost and net realizable value in accordance
been valued with IAS 2 Inventories. Any costs that could
 appropriately. not be reasonably allocated to the cost of
production (e.g. general and administrative
costs) and any abnormal wastage has been
excluded from the cost of inventory. An
acceptable valuation basis has been used to
value inventory cost at the period end
(e.g. FIFO, AVCO, etc.)

Assertions relating to presentation and disclosures

Examples: Related Party
Assertions Explanation
Disclosures
Transactions with related parties
Transactions and events
disclosed in the notes of financial
disclosed in the financial
Occurrence statements have occurred during
statements have occurred and
the period and relate to the audit
relate to the entity.
entity.
All transactions, balances, All related parties, related party
events and other matters that transactions and balances that
Completeness should have been disclosed should have been disclosed have
have been disclosed in the been disclosed in the notes of
financial statements. financial statements.
The nature of related party
Disclosed events,
transactions, balances and events
transactions, balances and
has been clearly disclosed in the
other financial matters have
notes of financial statements. Users
been classified appropriately
Classification & of the financial statements can
and presented clearly in a
Understandability clearly determine the financial
manner that promotes the
statement captions affected by the
understandability of
related party transactions and
information contained in the
balances and can easily ascertain
financial statements.
their financial effect.
Transactions, events, balances
Related party transactions, balances
and other financial matters
Accuracy & and events have been disclosed
have been disclosed
Valuation accurately at their appropriate
accurately at their appropriate
amounts.
amounts.

Use and Application

Auditors are required by ISAs to obtain sufficient & appropriate audit evidence in
respect of all material financial statement assertions. The use of assertions therefore
forms a critical element in the various stages of a financial statement audit as
described below.

Stage of
Application of Assertions
Audit
Planning As part of the risk assessment procedures, auditors are required to
 understand the entity and its environment including the assessment of the
risk of material misstatement (ROMM) due to fraud and error at the
financial statement and assertion level. (ISA 315.3 )

The assessment of ROMM at the financial statement and assertion level

provides the basis for determining the nature, timing and extent of audit
procedures that are necessary to obtain sufficient and appropriate audit
evidence in response to those assessed risks. (ISA 200.A36)
Substantive tests are performed to identify material misstatements at the
assertion level. In case of assertions whose ROMM has been assessed as
significant and no tests of control are planned to be performed, the
substantive procedures should include tests of detail (i.e. substantive
analytical procedures alone cannot be considered as sufficient and
appropriate audit evidence for assertions with a significant risk of
material misstatement. (ISA 330.21)
Testing
Tests of control (TOCs) are performed to assess the operating
effectiveness of controls at the financial statement and assertion level.
TOCs are necessary to validate the auditor's expectation of the operating
effectiveness of controls (as acquired from the risk assessment procedures
performed at the planning stage) and also in case where the performance
of substantive procedures alone cannot provide sufficient and appropriate
audit evidence in respect of a specific assertion. (ISA 330.8)
Auditor shall conclude whether sufficient and appropriate audit evidence
has been obtained for all material financial statement assertions taking
into account any revisions in the assessment of ROMM at the assertion
level. (ISA 330.25-6)
Completion
Where an auditor is unable to obtain sufficient and appropriate audit
evidence in respect of a material financial statement assertion, he is
required to modify the audit report accordingly. (ISA 330.27)
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