Assertions in the Audit of Financial Statements

1. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Definition
Audit Assertions are the implicit or explicit claims and representations made by the
management responsible for the preparation of financial statements regarding the
appropriateness of the various elements of financial statements and disclosures.
Elementsofthe financial statements include Assets,Liabilities,Equity,Income &Expenses. The
firstthree elementsrelate tothe statementof financial positionwhereasthe lattertworelate tothe
income statement.
Audit Assertions are also known as Management Assertions and Financial Statement
Assertions.
Managementassertionabout
-existence, -completeness, -valuation, -rights, -presentationand –disclose
Financial assertion about
-Transaction (time,posting,summarization, accuracy,classification, completeness,existence)
-Balance (accuracy, classification,completeness,existence,cutoff, value,right,obligation,
disclose)
Component of financial Statements
a. The primary statements
 Balance sheet
 Income statements
 Statements of change in equity
 Cash flow statement
 The note to account & schedule
b. The directors report
c. The auditor’s report
Five Types of Audit Tests
1.) Risk Assessment Procedures
2.) Test of Controls
3.) Substantive Tests of Transactions
4.) Analytical Procedures
5.) Tests of Details of Balances
AUDIT OF THE REVENUE AND RECEIPT
 NATURE:
REVENUE – exchange of goods and services with customer for receipts.
RECEIPT
- collection of Financing Revenue in cash
- Conversion Receipt Cycle Expenditure
- Disbursement Cycle

2. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
 3 types of transactions associatedwith Revenue and Receipt Cycle:
1.Sale of goods or rendering of a service (cash/credit)
2.Receipt of cash from customers
3.Return of goods
Basis oftesting
Testing requires existence of audit documents, their sufficiency and appropriateness. It also
requires assertions as to obtaining evidence.
Usingcategoriesfor test
 Occurrence
 Completeness
 Accuracy
 Cutoff
 Classification
 Existence
A. Documents (Evidence)
Types ofdocuments used and accounting records:
1.Customer order 2. Sales order 3. Credit approval order 4. Open-order report 5. Shipping 8.
Customer statement 9. Accounts receivable subsidiary ledger 10. Customer remittance advice 11.
Cash receipts journal
Two core aspects to be assured:
 Sufficiency: The measure of the qualityof audit
 Appropriateness: The measure of the qualityof auditi.e. relevance andreliabilityof audit
evidence.
B. Assertions in obtaining Audit evidence
-Class of transaction
-Account balance at the period end
-Presentation & disclose
Primary technique as to testing
1. Numbering
2. Date andparticulars
3. Relationwithbusiness
4. Passingauthority
5. Use of revenue stamp
6. Paperanalysis
7. Similaritybetweenwordsandfigures
8. Cancellationof evidence
9. Duplicate

3. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Income from interest:
Interestincome isthe revenueearnedbyalenderforuse of hisfundsor an investorontheir
investmentoveraperiodof time.
 Source of interest
 Bank voucher
 Rate of interest
 InterestPeriod
 Tax deduction
 Securities&otherrelateddocument
Rent Received:
The amount of moneycollectedbyalandlordfroma tenantor groupof tenantsforusinga particular
space.
 Amountof rent
 Receivable
 Date,repair& collection
 Carboncopy of receipt
 Checkedwithrentrolls
 Outstanding&advance rent
 Relationwithfigure andactual received
Commissionreceived:
Commissionincomereferstofeesearnedbybrokersandagentsinmakinga sale or closingadeal.
 Carboncopy of receipts
 Agreementdocuments
 Rate of commission
 Actual calculationof commission
Purchases System
Purchasesorder ≥ Goodsreceivednote ≥ Goods returnnote ≥ Purchasesinvoice ≥ Creditnote
≥ Payable ledger≥Payable ledgercontrol
Inventory
Inventorycanbe one of the largestassetof an enterprisespeciallyinmanufacturingconcern.
Inventorynormallycomprises:
o Raw materials
o Work inprocess
o Finishedgoods
o Maintenancessupply
o Store and spares
o Loss tools
The audit procedure forinventoryandrelatedcostof salesaccountare frequentlyextensive inaudit
engagement. Duringaudit
- Ensure staff are followinginventory
- Testcounts frominventorytoinventorysheet
- Note damaged,old.
- Reviewworkinprocess
- Inventoryholdbyclientforthirdparty
- Photocopythe inventorysheet

4. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Payroll system
A listof a company’semployeesandthe amountof moneytheyare to be paid.
 Managementcontrol objectives
 Control procedures-wagesandsalaries
- Approval &control of documents
- Arithmetical accuracy
- Control accounts
- Accessto assetsand records
 Substantive testing isan auditprocedure thatexaminesthe financial statementsand
supportingdocumentationtosee if theycontainerrors.These testsare neededasevidence
to supportthe assertionthatthe financial recordsof an entityare complete,valid,and
accurate.
There are manysubstantive teststhatanauditorcan use. The followinglistisasamplingof the
available tests:
- Issue a bank confirmationtotestendingcashbalances
- Contact customerstoconfirmthat accountsreceivable balancesare correct
- Observe the period-endphysical inventorycount
- Confirmthe validityof inventory valuationcalculations
- Physicallymatchfixedassetstofixedassetrecords
- Contact supplierstoconfirmthataccountspayable balancesare correct
- Contact lenderstoconfirmthatloanbalancesare correct
- Reviewboardof directorsminutestoverifythe existence of approveddividends
 Compliance test isan auditthat determineswhetheranorganizationisfollowingitsown
policiesandproceduresinaparticulararea. Anauditorengagesincompliance testsin
orderto be assuredthatthe evidence being reviewedaspartof an auditisvalid.If a
compliance testrevealsthatthe policiesandproceduresare functioningproperly,the
auditorcan reduce the amountof analytical review andvalidationproceduresthatwould
otherwise be used.
The activitiescommonlyusedinacompliance testare:
- Askingemployeesabouttheirduties
- Observingemployeesinthe conductof theirduties
- Reviewingdocumentationtosee if procedureshave beenfollowed
 The accounts receivable confirmation: When an auditor is examining the
accounting records of a client company, a primary technique for verifying the
existence of accounts receivable is to confirm them with the company's customers.
There are two forms of confirmation, which are:
 Positive confirmation. This is a request to provide a response to the auditor, whether
or not the customer agrees with the receivable information listed in the confirmation.
 Negative confirmation. This is a request to contact the auditor only if the customer
has an issue with the accounts receivable information contained within the
confirmation.
Confirmation letter: The entity concerned may send to creditors to confirm balance. This
letter can be send by entity or even by auditor, if auditor thinks it necessary.

5. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
 Verification means 'Proving the truth' or 'Confirmation'. Verification is an auditing
process in which auditor satisfy himself with the actual existence of assets and
liabilities appearing in the Statement of Financial position. Verification is usually
conducted through examination of existence, ownership, title, possession, proper
valuation and presence of any charge of lien over assets.
Thus, verification includes verifying:
1. The existence of the assets and liabilities.
2. Legal ownership and possession of the assets
3. Correct valuation, and
4. Ascertaining that the asset is free from any charge
Stepsfor the verificationof assets: Guideline & plan
1. Making comparison
2. Verificationof openingassets
3. Verificationthe acquisitionorimprovement
4. Self-construction
5. Examiningseparationbetweencapital andrevenue
6. Examine the verificationprocess
7. Evaluate verificationsystem
8. Examine the title deeds
Verificationtechnique
 Inspection
 Observation
 Enquiry
 Computation
 Analytical procedure
Audit fixedassets
1. Plant,machineryand equipment
a. Analytical procedures
i. Compare prior balance
ii. Compute the ratio of depreciation
iii. Compute the ratio of repair and maintenance
iv. Evaluate the ratio of insurance
v. Review the capital budget and spent money
b. Testof balance (substantive approach)
i. Validity- verify the existence
ii. Completeness- physically examine
iii. Cutoff- examine the purchaseand sales
iv. Ownership- examine confirmdeeds, title.
v. Accuracy- obtain a listof schedule
c. Pointof attention
I. Document to be examine
II. Depreciation charge
III. Maintenances register
IV. Experts opinion
2. Furniture andfixture
a. Managementcontrol aspect
b. Analytical procedures
c. Testof balance
3. Investment
I. Analytical approach
II. Substantive procedure

6. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Inventory Accounting:salesinvoices (w/ cost information);salesorder;shippingdocuments.
General Accounting:salesare recordedinsalesjournal andpostedtogeneral ledger;comparing
dailytotalsof salesjournal entriesanddailysalessummariesof Billing.
Accounts Receivable:salesare postedtoindividual customeraccountsinsubsidiaryledger.
SalesSystem: O D I R R B
O= Order D= Delivery I= Invoice R= Receivednote R= ReturnNote B= Bad debt
Debenture
A long-termsecurityyieldingafixedrate of interest,issuedbyacompanyand securedagainst
assets.
Share capital
The part of the capital of a company thatcomesfrom the issue of shares.
Goodwill
the establishedreputationof abusinessregardedasaquantifiableassetandcalculatedaspart of its
value whenitissold.
Wagesand salary
Salary isa fixedamountpaidortransferredtothe employeesatregularintervalsfortheir
performance andproductivity,atthe endof the monthwhereas wagesare hourlyor daily-based
paymentgiventothe laborfor the amountof workfinishedinaday.
Salesrevenue
The amountrealizedfromsellinggoodsorservicesinthe normal operationsof acompanyina
specifiedperiod.
Cash sale
An occasionwhensomethingissoldandpaymentismade immediately.