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Assertions
Assertions: are statements regarding the recognition, measurement, presentation and
disclosure of items included in the financial report.
-
Those charged with governance of an entity are responsible for ensuring that the
financial report gives a true and fair view of the entity and its operations
Management make assertions about each account and related note disclosures.
Example: Inventory Management should ensure that the item disclosed
exists, owned by the entity and is valued appropriately. A complete list
should represent the inventory owned by the entity
Auditors Uses assertions for transactions, account balances and presentations
and disclosure when assessing the risk of material misstatement and when
designing their audit procedures.
ASA 315 (ISA 315) requires auditors to use assertions when assessing the
risk of material misstatement and designing audit procedures
This means that auditors need to gather sufficient appropriate evidence
about each assertion for each transaction and account balance, or
disclosure
Assertions
related
OCCURRENCE
to transactions
and events COMPLETENESS
related to items
onACCURACY
the Income
Statment
CUT-OFF
CLASSIFICATION
EXISTENCE
Assertions Related
to
Balances
RIGHTS
AND
(Balance
sheet)
OBLIGATIONS
COMPLETENESS
VALUATION AND
ALLOCATION
OCCURRENCE,
RIGHTS AND
PRESENTATION
OBLIGATIONS
AND DISCLOSURE
RELATED
AUDIT
COMPLETENESS
ASSERTIONS
CLASSIFICATION
AND
UNDERSTANDABIL
ITY
ACCURACY AND
VALUATION
AUDIT
ASSERTION
TESTING TRANSACTIONS
MOST SIGNIFICANT
OCCURRENCE
COMPLETENES
S
ACCURACY
CUT-OFF
CLASSIFICATIO
N
TESTING ACCOUNT
BALANCES
MOST SIGNIFICANT
EXISTENCE
RIGHTS AND
OBLIGATIONS
COMPLETENESS
VALUATION AND
ALLOCATION
When testing for existence, an auditor searches for evidence to verify that asset,
liability and equity items included in the balances that appear in the financial report
actually exist. This assertion is particularly important when the auditor believes there is
a risk of overstatement.
When testing for rights and obligations, an auditor searches for evidence to verify
that recorded assets are owned by the entity and that recorded liabilities represent
commitments of the entity. This assertion is particularly important when the auditor
believes there is a risk that recorded assets or liabilities are not owned by the entity.
This assertion is different to existence, as the assets and liabilities may exist but not be
owned by the entity. An example of inventory that physically exists but does not satisfy
the rights and obligations assertion is inventory held on consignment (and therefore not
owned by the entity) which is recorded as an asset of the entity.
When testing for completeness, an auditor searches for assets, liabilities and equity
items and ensures they have been recorded. This assertion is particularly important
when the auditor believes there is a risk of understatement and the client has omitted
some items from the balance sheet. For example, an auditor will search for unrecorded
loans.
When testing for valuation and allocation, an auditor searches for evidence that
assets, liabilities and equity items have been recorded at appropriate amounts and
allocated to the correct general ledger accounts. This assertion is particularly important
when the auditor believes there is a risk of over or undervaluation. For example:
an auditor checks that inventory has been appropriately recorded at the lower of
cost and net realisable value (risk of overstatement)
an auditor tests for the adequacy of the allowance for doubtful debts provision
(risk of understatement)
an auditor checks that transactions are allocated to the correct account when
auditing research and development expenditure (risk of understatement of the
expense account).
AUDIT ASSERTION
COMPLETENESS
CLASSIFICATION AND
UNDERSTANDABILITY
Audit Evidence
Evidence is the information that an auditor uses when arriving at their opinion on
the truth and fairness of the clients financial report (ASA 500; ISA 500)
o It is the auditors responsibility to gather sufficient appropriate
evidence in order to arrive at an auditing opinion.
Those charged with governance at the client to ensure that the preparation of
financial reports is prepared in accordance with Australian Accounting Standards
and the corporations act. They also have a responsibility to ensure that records
are maintained and material misstatements are prevented (or detected and
corrected)
Audit risk affects the quantity and quality of evidence gathered by an auditor during the
risk response phase of the audit.
When there is a significant risk that an account will be misstated and the clients
system of internal controls is not considered to be effective at reducing that risk,
detection risk is set as low and more high-quality evidence is gathered when
conducting substantive tests of that account.
When there is a low risk that an account will be misstated and the clients system of
internal controls is considered to be adequate for that account, detection risk is set as
high and less high-quality evidence (Low) is gathered when conducting substantive
tests of that account.
The risk patterns illustrated in the provided figures are extremes. The risk of material
misstatement associated with most accounts falls somewhere in between. As such, the
amount of evidence gathered when conducting substantive procedures is a matter for
professional judgement and will vary from account to account and client to client.
Nevertheless, there is a direct relationship between the risk of material misstatement
(inherent and control risk) and the extent of quality evidence gathered when testing
transactions and balances.
Types of Evidence
External Confirmations (ASA 505)
External confirmation is a letter sent by an auditor directly to a third party who is asked
to respond on matters outlined in the letter. Auditor requests third party to requesting
them to confirm matter in confirmation letter. Including:
Lawyers Confirmation: confirm documents being held such as Property title deeds
and patents.
Information that can be confirmed in the clients name on the document
(rights and Obligation assertion) and may request the details of such
documents
A confirmation letter asks about the matter of fact details.
A representation letter may be sent to ask about the matters of legal opinion
such as the likely outcome of a court case
Types of confirmations
Negative form: reply if information incorrect
- A third party is asked to respond only if they disagree with the information in the
letter
Hard to interpret non-response: may be used be an auditor has conducted
detailed testing for existence
Positive form: reply in all circumstances
When a third party is asked to respond to matters included in the auditor in all
circumstances (that is, weather they agree or disagree with the information in
the letter)
Cannot know how well other party checked their records. However it
provide superior information compared to that of a negative form.
DOCUMENTARY EVIDENCE
Documentary evidence includes invoices, suppliers statements, bank statements,
minutes of meetings, correspondence and legal agreements. It may be internally
generated or externally generated. Internally generated documents are produced by
the client. Externally generated documents are generated by third parties. The
persuasiveness of audit evidence varies depending on its source. There are a number of
ways that documentary evidence can be used during an audit. An auditor can match
details recorded in a clients accounting records to supporting (external) documents to
verify the amount recorded.
Evidence can include:
- Purchase price detailed on invoices or statements Accuracy Assertion
- Recorded Investments- existence of the investment existence Assertion
- What is owed by the client- rights and obligation Assertion
- Traceability to financial reports classification and understandability Assertion
- Inventory held by third party included in the financial report - completeness
Assertion
- Details of agreements eg: lease agreements - classification and understandability
Assertion
- Ensuring minutes of meeting are read and adequately disclosed - classification
and understandability
Auditor can
Verify information in clients records by reading documents to confirm existence,
rights and obligations (vouching), or Trace from documents to clients records to
confirm classification, accuracy, completeness (tracing)
Representation
ASA 502 (ISA 501) requires an auditor to gather sufficient appropriate audit evidence
regarding any legal matters involving their client. Evidence is gathered from board
meeting minutes, discussions with client personnel and representation letters from their
clients lawyers. When an auditor has reason to believe that legal issues exist which
may impact the financial report, such as the client being sued by a third party, or when
a legal firm is engaged by the client for the first time, a representation letter is
requested from the legal firm(s) that their client deals with.
Legal representation letter is sent by client to its lawyers to complete and return
direct to auditor.
Can include the lawyers opinions on the legal matters, details of
disagreements with the lawyer has had with the client (ASA 502; ISA 501)
An auditor will come to this conclusion after enquiries of client personnel, reading board
meeting minutes, reading other documentation such as contracts and leases, reviewing
legal expenses and reading correspondence between their client and third parties
VERBAL EVIDENCE
COMPUTATIONAL EVIDENCE
Auditor checks mathematical accuracy; re-adding, can include complex recalculations, verifying formulae
PHYSICAL EVIDENCE