Directors produce or cause to be produced financial
statements. In doing so they are asserting that:
statements. In doing so they are asserting that:
·
The
individual items are:
The
individual items are:
·
Correctly
described
Correctly
described
·
Show
figures which are arithmetically correct or fairly estimated.
Show
figures which are arithmetically correct or fairly estimated.
·
The
accounts as a whole show a true and fair view.
The
accounts as a whole show a true and fair view.
ISA 500 splits the assertions into three
categories, as follows:
categories, as follows:
1 Assertion about classes of transactions and
events for the period under review
events for the period under review
Occurrence Transactions and events that have
been recorded relate to the company being audited and not to another
organization.
been recorded relate to the company being audited and not to another
organization.
Completeness All transactions and events that should
have been recorded have been recorded.
have been recorded have been recorded.
Accuracy Amounts and all other data
relating to recorded transactions have been recorded appropriately.
relating to recorded transactions have been recorded appropriately.
Cut-off Transactions and events
have been recorded in the correct accounting period.
have been recorded in the correct accounting period.
Classification Transactions and events have been
recorded in the proper accounts (in the books and records).
recorded in the proper accounts (in the books and records).
2 Assertions
about account balances at the period end
about account balances at the period end
Existence assets, liabilities and equity
interests (shareholdings) exist.
interests (shareholdings) exist.
Rights and the company holds or controls
the rights to assets, and all liabilities are those of the company
the rights to assets, and all liabilities are those of the company
Completeness all assets, liabilities and equity
interests that should have been recorded have been recorded.
interests that should have been recorded have been recorded.
Valuation
and allocation assets,
liabilities and equity interests (shareholdings) are included in the financial
statements at appropriate amounts and any resulting valuation or allocation
adjustments are properly recorded.
and allocation assets,
liabilities and equity interests (shareholdings) are included in the financial
statements at appropriate amounts and any resulting valuation or allocation
adjustments are properly recorded.
3
assertions about presentation and disclosure
assertions about presentation and disclosure
Occurrence
and rights disclosed
events, transactions and other matters have occurred and pertain to the
company.
and rights disclosed
events, transactions and other matters have occurred and pertain to the
company.
Completeness all disclosures
that should have been included in the financial statements have been included.
that should have been included in the financial statements have been included.
Classification
and financial
information is appropriately presented and described and disclosures are
clearly expressed
and financial
information is appropriately presented and described and disclosures are
clearly expressed
Understandability
The assertions are set down in this way but, as you
can see, some of them are the same in each category. Auditors are allowed to
combine them together so, for example, evidence validating assertions about
transactions in (1) can also be used to validate assertions about balances in
(2)s.
can see, some of them are the same in each category. Auditors are allowed to
combine them together so, for example, evidence validating assertions about
transactions in (1) can also be used to validate assertions about balances in
(2)s.
Providing auditors gather sufficient evidence of
the right type to validate these assertions they will have enough to support
their audit opinion.
the right type to validate these assertions they will have enough to support
their audit opinion.
The auditors’ attitude to each item in the accounts
will be as follows:
will be as follows:
·
Identify
the express and implied assertions made by the directors in including (or
excluding) the item in the accounts.
Identify
the express and implied assertions made by the directors in including (or
excluding) the item in the accounts.
·
Evaluate
each assertion for relative importance to assess the quality and quantity of
evidence required.
Evaluate
each assertion for relative importance to assess the quality and quantity of
evidence required.
·
Collect
information and evidence.
Collect
information and evidence.
·
Assess
the evidence for:
Assess
the evidence for:
I.
Appropriateness
subsumes the ideas of quality and reliability of a particular piece of audit
evidence and its relevance to a particular assertion.
II.
Sufficiency-more
of this in a later paragraph
It is important to note audit evidence tends to be
persuasive rather than absolute. Consequently, like a good detective, auditors
tend to seek evidence from several different sources or of a different nature
to support the same assertion.
persuasive rather than absolute. Consequently, like a good detective, auditors
tend to seek evidence from several different sources or of a different nature
to support the same assertion.
Note also that auditor only have to provide
reasonable assurance that the financial statements are free from a material
misstatement, they don’t have to prove the assertions beyond doubt-although if
they can do it is very reassuring.
reasonable assurance that the financial statements are free from a material
misstatement, they don’t have to prove the assertions beyond doubt-although if
they can do it is very reassuring.
Having formulated judgments on each individual item
in (or omitted from) the accounts, the auditors must formulate a judgments on
the truth and fairness of accounts as a whole.
in (or omitted from) the accounts, the auditors must formulate a judgments on
the truth and fairness of accounts as a whole.
To do this they will need other evidence in
addition to the judgments they have made on the individual items. As an extreme
example, they may need evidence of the directors’ implied assertion that the
accounts should be drawn up on the going concern principle.
addition to the judgments they have made on the individual items. As an extreme
example, they may need evidence of the directors’ implied assertion that the
accounts should be drawn up on the going concern principle.