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What is the purpose of categorising the assertions (completeness, accuracy etc) under classes of transactions and events, account balances, and presentation and disclosure?
The accounts of a company are made up of facts and fiction. The facts are those things which you can easily verify and determine to exist (e.g. purchase of machinery). The fiction are those things which are not so easily verifiable (such provisions and contingencies).
As an auditor you need to ensure that the facts are truthful and the the fiction is fair (hence true and fair). You do this by looking at the assertions which underlie all accounts (e.g. That an asset was bought and is in use – existence, that it cost $1mill – accuracy, that it was bought in the year in question and not after – completeness, that the company has unhindered use of the asset – rights and obligations, and that they state all relevant information regarding the accounts as per the standards – presentation).
The assertions are management’s statements on the accounts and as the auditor you have to see if the management’s assertions give a true and fair view of the company’s accounts.
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But why are they split over those three categories? Is it that there are different aspects to an item in the financial statements?
For example. With tests of controls you take an assertion (say completeness) and test the system for it. With sales you might say that a control objective for the completeness assertion is that all sales which have been made have been recorded. A control to achieve that objective would be to reconcile the daily sales list to the invoices raised each day. To test that control, you would inspect those reconciliations. There is very much a singular aspect to this assertion as it relates to actual transactions.
On the other hand, lets say you have competed your tests of controls and now you are looking at the receivables balance and are testing the details using substantive procedures. Here if you look at the completeness assertion again, there is more than one aspect. You need to confirm that the receivables balance:
1. Is complete in terms of the classes of transactions (ie. like the test of controls, all the sales which have been made have been recorded).
2. Is complete in terms of the account balance (ie. at year end the balances on each customer account were correct, by doing a receivables confirmation).
3. Is complete in its presentation and disclosure (ie. there is no suspicion that some of the balances should be written off as bad debts, it is correct to state the balances at their full amount in the statement of financial position).
Ultimately what I am trying to get my head around is why are there these three categories of assertions for tests of details, but just singular assertions for tests of controls. I think I might have it now, just need someone to confirm.
Those steps relate to the stages of accounting information.
1. Classes of transaction relates to the initiation step
2. Account balances relates to the processing step
3. Presentation and disclosure relates to the reporting step.For each assertion you have to basically look at the accounting process from commencing the transaction through recording and then reporting.
In the above case you are looking at substantive testing. For a test of control however, you are merely determining whether the system works as documented and the level of error expected in the system. The only assertion you will really need to worry about then is completeness as this will indicate that all transaction are recorded in the appropriate period, with the correct amounts, with proper valuation and that all controls in place to ensure that the transaction is authorised are in place.
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