Assertions and audit evidence

1 Introduction

When a figure appears in financial statements it is making a number of assertions. For example, if the receivables figure is $2,453,000, the figure is asserting:

• The amount has been properly valued
  

• The receivables are owned by the company
  

• The receivables exist
  

• The receivables are complete
  

• The amount is indeed properly described as receivables.
  

It is not possible to simply audit $2,453,000 ‘in one go’: each financial statement assertion requires audit evidence.

2 Assertions about classes of transactions and events and related disclosures

These assertions relate to theperiod under audit:

• Occurrence–   transactions and events that have been recorded or disclosed have occurred and pertain to the entity.
  

• Completeness–   all transactions and events that should have been recorded/disclosed have been recorded/disclosed.
  

• Accuracy   –   amounts have been recorded appropriately and related disclosures have been properly measured and described.
  

• Cut-off   –   transactions and events have been recorded in the correct accounting period.
  

• Classification   –   transactions and events have been recorded in the proper accounts.
  

• Presentation   –   transactions and events are appropriately aggregated (or disaggregated) and clearly described. Related disclosures are relevant and understandable.

3 Assertions about account balances and related disclosures

These assertions relate to theperiod end:

• Existence   –   assets, liabilities and equity interests exist.
  

• Rights and obligations   –   the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
  

• Completeness   –   all assets, liabilities and equity interests that should have been recorded have been recorded and all related disclosures included.
  

• Accuracy, valuation and allocation   –   assets, liabilities and equity interests are included at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded Related disclosures are appropriately measured and described.
  

• Classification   –   assets, liabilities and equity interests have been recorded in the proper accounts.
  

• Presentation   –   assets, liabilities and equity interests are appropriately aggregated (or disaggregated) and clearly described. Related disclosures are relevant and understandable.
  

Learnthe assertions:

• Note that completeness, accuracy, classification and presentation are relevant toboth'transactions and events' and 'account balances' and their related disclosures.
  

• Understand that occurrence and cut-off relateonlyto transactions and events.
  

• Understand that existence, rights and obligations and valuation and allocation relateonlyto account balances.
  

4 Audit evidence

4.1 Audit procedures for obtaining audit evidence

These are the possible procedures:

• Inspection
  

• Observation
  

• External confirmation
  

• Recalculation
  

• Reperformance
  

• Analytical procedures
  

• Enquiry
  

For the sake of easy learning they are sometimes written to (almost) form the vowels AEIOU:

• Analytical procedures
  

• Enquiry and confirmation
  

• Inspection
  

• Observation
  

• RecalcUlation and reperformance
  

There are no methods to collect evidence that cannot be categorised under one of these headings.

Note from the following examples that:

• Analytical procedures, which concern monetary amounts, do not apply to controls.
  

• Observation, which means looking at a process or procedure, is used in tests of controls.
  

4.2 Examples of evidence collecting procedures

Note that:

• For a test of control, enquiryalonewould never be sufficient to conclude that a control is operating effectively.
  

• Substantive procedures are directed to specific assertions.

4.3 Sufficient, appropriate audit evidence

So now we know the various procedures to obtain audit evidence, but how much audit evidence is needed? The sufficiency and appropriateness of audit evidence are interrelated.

Sufficiencyrelates to thequantityof audit evidence. The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality.

Appropriatenessrelates to thequalityof audit evidence - itsrelevance(ie to the financial statement assertions) andreliability. With respect to thereliabilityof audit evidence we can say that, in general:

• External evidence is stronger than internal evidence.
  

• Written is stronger than oral.
  

• Evidence is better if the internal control system is strong.
  

• Evidence obtained directly by the auditor is better than evidence obtained via the client.
  

• Originals are better than photocopies.
  

Therefore, a director simply telling the auditor something is very weak evidence (internal, oral). A bank writing to the auditor to confirm the bank balance is very strong evidence (written, external, obtained directly by the auditor).

What are the financial statement assertions about classes of transaction and events?

Which financial statement assertions relate to balances at the period end?

What are the ways in which audit evidence can be collected (AEIOU)?

An auditor requires __________ audit evidence that the financial statements are free from material misstatement.

Complete this statement.

Select from each of the following pairs of terms, the word(s) that describe the more reliable audit evidence.