19/6/2020 COMPILED BY MAJORY TNOTENDA NYAZEMA

The Use of Assertions By Auditors

Learning Outcomes

❑ The assertions contained in the financial statements.

❑ The assertions in relation to classes of transactions,
account balances, & presentation and disclosures.
❑ The use of assertions in obtaining audit evidence.

19/6/2020 COMPILED BY MAJORY TNOTENDA NYAZEMA

 Assertions contained in the financial
statements
Financial statements are a summary of management’s assertions.
Assertions are representations by management, explicit / otherwise,
that are embodied in the financial statements.
Example

Expense was for genuine

The SOCI for employees
the year 2017,
contains
The expense is incurred for the
payroll
year 2017, whether paid / not
expenses.
What do they
Employees worked on the
mean?
company’s business

19/6/2020 COMPILED BY MAJORY TNOTENDA NYAZEMA

 Types of Assertions

Occurrence:
❑ Transaction actually took place
❑ Transaction relate to the entity
Continuing the above example:
The payroll expenses have actually been incurred & the payroll was made to genuine
employees

Completeness:
❑ Transactions have been recorded. No transactions have been left out
❑ All assets, liabilities, equity interests (capital & reserves) & other disclosures
have been included in the financial statements
Example
The payroll expenses have been fully recorded & the expenses have been correctly
disclosed in the financial statements i.e. in the SOFP (for unpaid payroll expenses) & the
SOCI (for the accrued expenses of the year).

Continued…
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Accuracy
Amounts & other data have been recorded accurately.
Example
The payroll expenses are correctly calculated and recorded.

Valuation & allocation:

❑ All the items in the financial statements have been included at correct values
according to company policy
❑ Any allocations / valuation adjustments required have been made correctly

Example
This assertion normally applies to the items in the SOFP. Therefore if the financial
statement includes non-current assets, it means that the non-current asset are
correctly recorded i.e. the original cost (for a new asset) was correctly recorded,
depreciation was correctly charged, if there was an impairment loss, the loss was
recorded in the books, etc.
Continued…
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Cutoff
Transactions & events have been recorded in the correct accounting period.
Example
The payroll expenses for the full accounting year was recorded.
Classification
❑ Transactions & events have been recorded in the proper ledger accounts.
❑ Classification in the financial statements is appropriate to management policy.
Example
The payroll expenses was recorded in the correct account head i.e. wages
account for direct wages paid to production staff & staff salary for other staff
members.
.
Existence: assets, liabilities & equity interests (capital & reserves) really exist on
the reporting date.
Example
The non-current asset are physically present on the reporting date.

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Continued…
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Rights & obligations:

❑ The entity has a right to an asset. It is free to use / dispose of the asset as it
sees fit.
❑ The entity is obliged to pay the liability that is shown in the balance sheet.

Example
Again this applies to the items of the SOFP.
For example, the non-current assets belong to the company i.e. the company has
the legal documents which prove that it is the owner of the assets.

Understandability: Disclosures are clearly expressed to make them

understandable to the users.

Example
This applies to the items which are in the notes to accounts.
For example the status & the value of contingent assets are correctly explained in
the notes to accounts.

19/6/2020 COMPILED BY MAJORY TNOTENDA NYAZEMA

 Tip: Mnemonics to remember

You may rearrange the words, rename some (without changing the meaning) &
prepare a word with the first alphabets, as follows:

Completeness
Occurrence
Measurement (Valuation & allocation)
Presentation & disclosure (Understandability)
Accuracy
Rights & obligations
Existence

This makes word compare which is easy to memorise the list but C’s to remember
separately for Cutoff & Classification.
So remember COMPARE + C2

19/6/2020 COMPILED BY MAJORY TNOTENDA NYAZEMA

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Explicit assertions Disclosed in the financial statements

To be understood by user of financial

Implicit assertions statements even if they are not
explicitly stated

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ISA 315: Identifying & assessing the risks of material misstatement

through understanding the entity & its environment, divides assertions
in the financial statements under the following categories:

Assertions About

Classes of transactions &

events

Account balances

Presentation &
disclosure

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Completeness Existence
Occurrence Rights & obligations
+ Valuation Accuracy
Cutoff Understanding

Classification

Transactions & events (during the period) (income + expenses) COA+C2

Period end balances (assets, liabilities & equity) CMRE

Presentation & disclosure (in the financial statements) COMPAR

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 Principles & objectives of transaction testing, account balance
testing &
disclosure testing & the use of assertion in obtaining audit evidence

Auditor’s express an opinion on the financial

statements

Auditor's opinion enhances user’s confidence in the

financial statements as well as in an entity
Objectives
of testing
Users make an important decision based on the
auditor’s reports, e.g. whether to buy, hold / sell
securities etc.

Auditors have to test all the assertions before

relying on them

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 Testing of assertions
Categories of assertions tested
❑ Auditors tests the assertions
Transaction
❑ Auditor looks for evidence related to the assertions in the
testing
transactions & events
Example
Purchases in the financial statements amount to $5m. Evidence will be tested to check the following
assertions:

❑ Completeness
(a) Assertion: All the purchases for the period are recorded.
(b) Evidence: It is checked whether the system ensures that all the goods received have been
recorded as purchases. A sample of goods receipt notes is checked in the purchase journal &
accounts payable ledger.

❑ Occurrence
(a) Assertion: Goods were actually received.
Evidence: This can be tested by verifying the signed goods receipt notes which indicates the receipt
of goods and entries in the stores records.
(b) Assertion: They relate to the entity.
Evidence: The purchase orders raised
19/6/2020 byBY the
COMPILED entity
MAJORY & the
TNOTENDA purchase invoices raised by the customer
NYAZEMA
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❑ Accuracy
a) Assertion: Amounts recorded in the books of accounts are accurate.
b) Evidence: These amounts are cross-checked with the amounts mentioned on
the purchase orders, invoices & quantities received.

❑ Cut-off
a) Assertion: The purchases appearing in the financial statements relate to the
current accounting period only.
b) Evidence: This will require ensuring that all the goods received (& shown as
consumed / held in inventory) up to the date of SOFP are recorded as
purchases whether the invoice is received / not. Transactions taking place
immediately before / after the SOFP date are particularly looked into.

❑ Classification
a) Assertion: The purchases have been recorded in the correct ledger accounts. For
example, purchases of equipment should not be recorded as ordinary purchases,
since equipment is an asset.
b) Evidence: This is tested with the help of purchase orders, goods receipts notes
19/6/2020 & purchase invoices. COMPILED BY MAJORY TNOTENDA NYAZEMA
THE END…..
THANK YOU

19/6/2020 COMPILED BY MAJORY TNOTENDA NYAZEMA