Audit Assertions &
Substantive Tests
Objective of Conducting an
Audit of Financial Statements
The purpose of an audit is to
provide financial statement
users with an opinion by the
auditor on whether the financial
statements are presented fairly,
in all material respects, in
accordance with applicable
financial accounting framework.
Objective of Conducting an
Audit of Financial Statements
➢obtaining reasonable assurance about whether financial
statements are free of material misstatements, whether
caused by error or fraud.
➢The auditor is responsible to obtain reasonable assurance,
not absolute assurance.
➢The auditor is responsible for detecting material
(significant) misstatements, not minor misstatements that
do not affect users decisions.
➢An error is an unintentional misstatement, whereas fraud
is intentional
Two Classes of Audit Assertions
TransactionRelated
Assertions
Account
Balance- Related
Assertions
must be met for any given
class of transactions
before the auditor can
conclude that transactions
are properly recorded
must be met for each
account balance before
the auditor can conclude
that the account is
properly recorded
The following five items are classified as
assertions related to transactions, mostly in
regard to the income statement
1- Existence- recorded transactions
exist
TransactionRelated
Assertions
2- Completeness- existing
transactions are recorded.
3- Accuracy- recorded transactions are
stated at the correct amounts.
4- Classification- transactions included
in the clients’ journals are properly
classified.
5- Timing -transactions are recorded
on the correct dates.
Transaction-Related Assertions
1- Existence- recorded transactions exist
➢This assertion deals with whether recorded transactions
have actually occurred during the accounting period.
➢Deals with potential overstatement.
➢For example, inclusion of a sale in the sales journal when
no sale occurred violates the existence objective.
Transaction-Related Assertions
2- Completeness- existing transactions are recorded.
➢This objective deals with whether all transactions that should
have been recorded in the journals have actually been recorded.
➢Deals with potential understatement (unrecorded transactions)
➢Failure to include a sale in the sales journal and general ledger
when a sale occurred violates the completeness assertion.
Transaction-Related Assertions
3- Accuracy- recorded transactions are stated at the
correct amounts.
➢This assertion deals with the accuracy of information for
accounting transactions .
➢For sales transactions, there would be a violation of the
accuracy assertion if
•
•
•
•
The quantity of goods shipped was different from the quantity billed.
The wrong selling price was used for billing.
Adding errors occurred in billing.
The wrong amount was included in sales journal.
Transaction-Related Assertions
4- Classification- transactions included in the clients’
journals are properly classified.
➢Deals with whether transactions are recorded in the
appropriate accounts.
➢Examples for misclassification for sales are
• Including cash sales as credit sales
• Recording a sale of operating fixed asset as revenue
Transaction -Related Assertions
5- Timing and Cutoff- transactions are recorded on
the correct dates and proper period
➢For example the auditor needs to make sure that
• sales transaction is recorded on the date of shipment to
customers.
• transaction that occur near the end of the accounting
period are recorded in the correct accounting period.
The following four items are classified as assertions
related to the ending balances in accounts, and so
relate primarily to the balance sheet:
1- Existence. whether the asset/liability
balances appearing in the balance sheet
actually exist and should actually be
included.
Account
BalanceRelated
Assertions
2- Completeness. whether all existing
assets and liabilities are included in the
balance sheet and nothing is missing.
3- Rights and obligations. whether the
assets recorded in the balance sheet are
owned by the entity and liabilities
included in the balance sheet represent
obligations that belong to the entity.
4- Valuation. Whether asset, liability, and
equity amounts are included at the
appropriate amounts.
Account Balance-Related
Assertions
1- Existence. whether the asset and liability balances
appearing in the balance sheet actually exist and
should actually be included.
➢For example, including accounts receivable from a
customer in the accounts receivable trial balance when
there is no receivable from that customer violates the
existence objective.
Account Balance-Related Assertions
2- Completeness. whether all existing assets and
➢F
liabilities are included in the balance sheet and
nothing is missing.
➢For example, failure to include an accounts receivable from
a customer in the accounts receivable trial balance when a
receivable exists violates the completeness objective.
Account Balance-Related Assertions
3- Rights and obligations.
❖ whether the company owns and has ownership rights or
➢F usage rights to all assets recognized in the balance sheet
❖ whether the liabilities included in the balance sheet
represent obligations that belong to the company.
➢For example the auditor should conduct physical inventory
count to make sure that the entity owns or controls the
inventory recognized in the financial statements.
Account Balance-Related
Assertions
4- Valuation. Whether asset, liability, and equity
amounts are included at the appropriate amounts.
➢For example, the auditor should ensure that uncollectible
receivables have been allowed for. i.e. Allowance for bad
debts have been properly considered when measuring
accounts receivable.
References
•Arens, A. A., Elder, R. J., & Beasley, M. S. (2010). Auditing and assurance
services: An integrated approach. Upper Saddle River, N.J: Prentice Hall.
•Whittington, R., & Pany, K. (2008). Principles of auditing & other assurance
services. Boston: McGraw-Hill/Irwin.
•Louwers, T. J. (2007). Auditing and assurance services. New York, NY:
McGraw-Hill.
•Beasley,M.S., , Buckless,F.A., Glover, S.M, Parwitt,D.F. (2014).Auditing Cases:
An Interactive Learning Approach. Pearson; 6 edition.
•Messier, W. F. (2000). Auditing & assurance services: A systematic approach.
Boston: Irwin/McGraw-Hill.