The audit of assertions.

Relevant to Foundations in Audit (FAU) and Audit and Assurance (AA)

This article will focus on assertions as identified by ISA 315 (Revised 2019) and also provides useful
guidance to candidates on how to tackle questions dealing with these.

Interim and final audit procedures

During the interim audit, the system of internal control is documented and evaluated. This will
determine the mix of tests of control and substantive procedures but both will tend to focus on
transactions that have occurred so far in the period.

During the final audit, the focus is on the financial statements and the assertions about assets, liabilities
and equity interests. At this stage the auditor will design substantive procedures to ensure that
assurance has been gained over all relevant assertions.

Assertions

Transactions include sales, purchases, and wages paid during the accounting period. Account balances
include all the asset, liabilities and equity interests included in the statement of financial position at the
period end.

Obviously there is a link between the two because if the auditor performs tests to confirm the
occurrence of sales this will also provide some assurance about the existence of receivables, although
the auditor may perform other tests specifically focussed on existence.

The assertions listed in ISA 315 (Revised 2019) are as follows:

Assertions about classes of transactions and events and related disclosures for the period under audit
(i) Occurrence – the transactions and events that have been recorded or disclosed have occurred,
and such transactions and events pertain to the entity.
(ii) Completeness – all transactions and events that should have been recorded have been recorded, and
all related disclosures that should have been included in the financial statements have been included.
(iii) Accuracy – amounts and other data relating to recorded transactions and events have been recorded
appropriately, and related disclosures have been appropriately measured and described.
(iv) Cut–off – transactions and events have been recorded in the correct accounting period.
(v) Classification – transactions and events have been recorded in the proper accounts.
(vi) Presentation – transactions and events are appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and understandable in the context of the requirements of
the applicable financial reporting framework.

Assertions about account balances and related disclosures at the period end
(i) Existence – assets, liabilities and equity interests exist.
(ii) Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
(iii) Completeness – all assets, liabilities and equity interests that should have been recorded have been
recorded, and all related disclosures that should have been included in the financial statements have
been included.
(iv) Accuracy, valuation and allocation – assets, liabilities and equity interests have been included in the
financial statements at appropriate amounts and any resulting valuation or allocation adjustments have
been appropriately recorded, and related disclosures have been appropriately measured and described.
(v) Classification – assets, liabilities and equity interests have been recorded in the proper accounts.
(vi) Presentation – assets, liabilities and equity interests are appropriately aggregated or disaggregated
and clearly described, and related disclosures are relevant and understandable in the context of the
requirements of the applicable financial reporting framework.

Interpretation of assertions and appropriate audit procedures

In many cases, the meaning of the assertions is fairly obvious and in preparation for their FAU or AA
exam candidates are reminded of the importance to learn and be able to apply the use of assertions in
the course of the audit. Particularly, candidates need to be able to identify and explain the assertions,
identify which assertion is being tested by a particular audit procedure and to describe audit procedures
for relevant assertions in testing a specific transaction or balance, bearing in mind that the relevant
disclosures should also be considered when deriving appropriate procedures.

Below is a summary of the assertions, a practical application of how the assertions are applied and some
example audit procedures relevant to each.

Transaction assertions

Occurrence – this means that the transactions recorded or disclosed actually happened and relate to the
entity. For example, that a recorded sale represents goods which were ordered by valid customers and
were despatched and invoiced in the period. An alternative way of putting this is that sales are genuine
and are not overstated.

Relevant test – select a sample of entries from the sales account in the general ledger and trace to the
appropriate sales invoice and supporting goods dispatched notes and customer orders.

Completeness – this means that transactions that should have been recorded and disclosed have not
been omitted.

Relevant test – select a sample of customer orders and check to dispatch notes and sales invoices and
the posting to the sales account in the general ledger.

Note the difference in the direction of the above test. In order to test completeness, the procedure
should start from the underlying documents and check to the entries in the relevant ledger to ensure
none have been missed. To test for occurrence the procedures will go the other way and start with the
entry in the ledger and check back to the supporting documentation to ensure the transaction actually
happened.

Accuracy – this means that there have been no errors while preparing documents or in posting
transactions to ledgers. The reference to disclosures being appropriately measured and
described means that the figures and explanations are not misstated.

Relevant test – reperformance of calculations on invoices, payroll, etc, and the review of control account
reconciliations are designed to provide assurance about accuracy.

Cut–off – that transactions are recorded in the correct accounting period.

Classification – that transactions are recorded in the appropriate accounts – for example, the purchase
of raw materials has not been posted to repairs and maintenance.

Relevant test – check purchase invoices postings to general ledger accounts.

Presentation – this means that the descriptions and disclosures of transactions are relevant and easy to
understand. There is a reference to transactions being appropriately aggregated or disaggregated.
Aggregation is the adding together of individual items. Disaggregation is the separation of an item, or an
aggregated group of items, into component parts. The notes to the financial statements are often used
to disaggregate totals shown in the statement of profit or loss. Materiality needs to be considered when
judgements are made about the level of aggregation and disaggregation.

Relevant test – confirm that the total employee benefits expense is analysed in the notes to the financial
statements under separate headings– ie wages and salaries, pension costs, social security contributions
and taxes, etc.

Account balance assertions

Existence – means that assets and liabilities really do exist and there has been no overstatement – for
example, by the inclusion of fictitious receivables or inventory. This assertion is very closely related to
the occurrence assertion for transactions.

Relevant tests – physical verification of non–current assets, circularisation of receivables, payables and
the bank letter.

Rights and obligations – means that the entity has a legal title or controls the rights to an asset or has
an obligation to repay a liability.

Relevant tests – in the case of property, deeds of title can be reviewed. Current assets are often agreed
to purchase invoices although these are primarily used to confirm cost. Long term liabilities such as loans
can be agreed to the relevant loan agreement.

Completeness – that there are no omissions and assets and liabilities that should be recorded and
disclosed have been. In other words there has been no understatement of assets or liabilities.

Relevant tests – A review of the repairs and expenditure account can sometimes identify items that
should have been capitalised and have been omitted from non–current assets. Reconciliation of payables
ledger balances to suppliers’ statements is primarily designed to confirm completeness although it also
gives assurance about existence.

Accuracy, valuation and allocation – means that amounts at which assets, liabilities and equity interests
are valued, recorded and disclosed are all appropriate. The reference to allocation refers to matters such
as the inclusion of appropriate overhead amounts into inventory valuation.

Relevant tests – Vouching the cost of assets to purchase invoices and checking depreciation rates and
calculations.
Classification – means that assets, liabilities and equity interests are recorded in the proper accounts.

Relevant tests – the test for transactions of checking purchase invoice postings to the appropriate
accounts in the general ledger will be relevant again. Also that research expenditure is only classified as
development expenditure if it meets the criteria specified in IAS® 38 Intangible Assets.

Presentation – this means that the descriptions and disclosures of assets and liabilities are relevant and
easy to understand. The points made above regarding aggregation and disaggregation of transactions
also apply to assets, liabilities and equity interests.

Relevant tests – auditors often use disclosure checklists to ensure that financial statement presentation
complies with accounting standards and relevant legislation. These cover all items (transactions, assets,
liabilities and equity interests) and would include for example confirming that disclosures relating to
non–current assets include cost, additions, disposals, depreciation, etc.

Typical exam questions

Questions on assertions may often be included in the objective test questions (OTs) in the AA and FAU
exams and may also appear in the constructed response questions where candidates may be required to
demonstrate knowledge of the assertions and procedures that are linked to particular transaction or
account balance assertions in more detail.

Below are some examples which provide an indication, but not an exhaustive list of how assertions can
be tested at FAU and AA.

Which of the following substantive procedures provides evidence over the COMPLETENESS of non–
current assets?

A. Select a sample of assets included in the non–current asset register and physically verify them at the
client premises
B. Review the repairs and maintenance expense account to identify any items of a capital nature
C. For assets disposed of, agree the sale proceeds to supporting documentation and cash book
D. For a sample of non-current assets, recalculate the depreciation charge

In order to tackle a question like this, candidates are encouraged to work through each procedure and
think about the objective of the auditor when they are testing for completeness and to consider whether
the procedure as presented would satisfy that objective:

A. Confirms existence not completeness – the direction of the test is key here. Had the test been the
other way selecting sample of non–current assets in the factory and tracing to the non–current asset
register, that would have confirmed completeness.
B. Confirms completeness as the auditor may identify non–current assets that have not been capitalised
and is therefore the correct answer.
C. Confirms the proceeds of sale so is more relevant to accuracy or valuation.
D. Confirms depreciation so is also more relevant to accuracy or valuation.

Candidates may be asked to identify and apply the assertions to a specified area of the financial
statements in a constructed response question as follows:
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the VALUATION of X Co’s inventory.

Candidates must be able to link relevant procedures to the specific assertion required. In this instance,
for example procedures performed at the inventory count which provide evidence of existence and
completeness of inventory would not be relevant.

Conclusion

Assertions have always been an important area of the syllabus for audit examinations.

Candidates should ensure that they know the assertions and can explain what they mean. Candidates
should not simply memorise these tests but also ensure they understand the reasons why the test
provides assurance about the particular assertion. In some instances, the direction of the test will be a
key point to consider.

Written by a member of the Audit and Assurance examining team