Financial statements and assertions in auditing

Directors produce or cause to be produced financial
statements. In doing so they are asserting that:
·        
The
individual items are:
·                    
Correctly
described
·                    
Show
figures which are arithmetically correct or fairly estimated.

·        
The
accounts as a whole show a true and fair view.
ISA 500 splits the assertions into three
categories, as follows:
1 Assertion about classes of transactions and
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.
Completeness        All transactions and events that should
have been recorded have been recorded.    
Accuracy                 Amounts and all other data
relating to recorded transactions have been recorded appropriately.
Cut-off                       Transactions and events
have been recorded in the correct accounting period.
Classification           Transactions and events have been
recorded in the proper accounts (in the books and records).
2 Assertions
about account balances at the period end
Existence                  assets, liabilities and equity
interests (shareholdings) exist.
Rights and                the company holds or controls
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.
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.
3
assertions about presentation and disclosure
Occurrence
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.
Classification
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.
Providing auditors gather sufficient evidence of
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:
·        
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.
·        
Collect
information and evidence.
·        
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.
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.
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.
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.

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