Question

Auditors audit "management assertions" in order to render an opinion on a client company's financial statements. What are management assertions and how are they related to financial statements? Why are management assertions the focus of an audit?

Answer 1

The responsibility of preparation and appropriate presentation of Financial Statements lies with the management. In the process of preparation, the management makes certain implicit or explicit assertions. These assertions are known as Management assertions.

Management assertions fall into the following three classifications:

• Transaction-level assertions: These are assertions mostly in regard to the items of the income statement. The assertions are Accuracy, Classification, Completeness, Occurrence.
• Account balance assertions: These assertions relate to the ending balances in accounts, i.e primarily to the balance sheet. The Assertions are Completeness, Existence, Rights and obligations,Valuation.
• Presentation and disclosure assertions: These as assertions related to the presentation of information within the financial statements, as well as the accompanying disclosures. The Assertions are Accuracy, Completeness, Occurrence, Rights and obligations.

These assertions are relevant to auditors performing a financial statement audit in two ways.

• Firstly, the objective of a financial statement audit is to obtain sufficient appropriate audit evidence to conclude on whether the financial statements present fairly, in all material respects, the financial position of a company and the results of its operations and cash flows. In developing that conclusion, the auditor evaluates whether audit evidence corroborates or contradicts financial statement assertions.
  AND
• Second, auditors are required to consider the risk of material misstatement through understanding the entity and its environment, including the entity's internal control. Financial statement assertions provide a framework to assess the risk of material misstatement in each significant account balance or class of transactions.