Question

7) When preparing financial statements, it is implied that the management are making assertions for each transaction class and account balance. What does it mean “assertions” providing examples (2 marks) and what areas would an auditor look at (there are six) to verify these assertions, providing brief explanation to each? (3 marks)

Answer 1

The dictionary meaning of the assertion is

A confident statement of fact

This relates the assertions taken by the management while preparing the financial statements in the following way

Management show the assertions in the balances of the elements of the financial statements.

That means the management is stating the facts about the balances of all the elements of the financial statements. I e assets and liabilities

Examples of assertions are as follows

1. Accuracy of the transaction

2. Completeness of the transaction

3. Cutoff procedures implemented in the preparation of the financial statements.

4. Existence of transaction

5. occurence of transaction

6.valuation of transaction

these are some assertions done by management while preparation of financial statements.

auditor has responsibility towards the verification of the assertion that the management has taken while preparation of the financial statements as follows

The auditor had to verify different points for different elements of the financial statements as follows

1. Management stated that the debtors is 500000 in financial statements then the auditor had to check how the debtors is valued whether there is any bad debts of there is any bad debts how they are treated in valuation of debtors

Here the auditor verified the valuation assertion of the debtors

2. Management has stated that the machinery is 100000 in the financial statements then the auditor has to check how the valuation of the machinery is done by the management. How the machinery was depreciated during the year.

Here the auditor verified the valuation and existence assertion of machinery

3. The management stated that sales is 4000000 in profit and loss account then the auditor has to check till which date the sales has been taken for preparing the financial statements

Here the auditor has verified the occurence and cutoff assertions of the sales

And the auditor has to check all the six areas of the assertions are

1. Existence

2. Valuation

3. Occurence

4. Cutoff

5. Completeness

6. Accuracy of all the transactions in the books of accounts and in financial statements

These are all the information required to solve the given question.

I hope, all the above given information and explanations are useful and helpful to you.

Thank you.