Assertions and evidence - Transaction and balance assertions

Learning Outcomes

This article explains audit assertions relevant to classes of transactions, account balances, and disclosures. You will learn the main types of assertions, why they matter, and how they shape audit procedures. By the end, you should be able to identify assertions in scenarios, relate procedures to specific assertions, and explain how evidence is evaluated for quantity and quality—core skills for ACCA Audit and Assurance exams.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand the role of assertions and how auditors obtain evidence to support them. Focus your revision on:

• The purpose and types of assertions in financial statements—transactions, balances, and disclosures.
• Matching audit procedures to relevant assertions for both classes of transactions and account balances, as required by ISA 315 (Revised).
• Key tests and sources of evidence, including inspection, observation, external confirmations, recalculation, re-performance, analytical procedures, and enquiry.
• Evaluation of the quality and quantity of audit evidence relative to the assertion being tested.
• Relevance and reliability of evidence in forming audit conclusions (ISA 500).
• Distinguishing between substantive procedures, tests of controls, and the assertions each supports.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which assertion does the following audit procedure test: inspecting sales invoices and matching them to despatch notes?
2. Name two assertions relevant to account balances and explain their meaning in one sentence each.
3. What is the main difference, in terms of assertions tested, between tracing from supporting documents to accounting records versus tracing from accounting records to supporting documents?
4. Can external confirmation be used to provide evidence for both existence and completeness assertions? Give an example.

Introduction

Audit assertions are representations by management about financial statement elements. They form the basis for identifying potential misstatements and for designing audit procedures that provide evidence. Assertions vary depending on whether the subject is a class of transactions, an account balance, or disclosures. Understanding these is essential for planning and performing effective audits and for justifying procedures during the ACCA exam.

Key Term: assertion
A statement by management, explicit or implicit, regarding the recognition, measurement, presentation, and disclosure of transactions, balances, or disclosures in the financial statements.

Assertions and Their Types

Auditors evaluate financial statements against a set of assertions. These are divided, by ISA 315 (Revised), into three principal areas:

Assertions about Classes of Transactions and Events

These apply to transactions such as sales, purchases, or payroll during the reporting period:

• Occurrence: Transactions and events recorded occurred and pertain to the entity.
• Completeness: All transactions that should be recorded are recorded.
• Accuracy: Amounts and data are recorded appropriately.
• Cut-off: Transactions are recorded in the correct accounting period.
• Classification: Transactions are recorded in the proper accounts.
• Presentation: Transactions are clearly described and disclosures are relevant and understandable.

Key Term: occurrence assertion
Assumes recorded transactions and events actually happened and relate to the entity.

Key Term: completeness assertion
Ensures that all transactions, balances, or disclosures that should be recorded are included in the financial statements.

Key Term: accuracy assertion
Affirms that amounts, calculations, or data relating to transactions or balances are recorded accurately.

Key Term: cut-off assertion
Confirms transactions are recorded in the correct accounting period, especially around the year-end.

Key Term: classification assertion
Checks that transactions and balances are recorded in the correct accounts and with proper descriptions.

Key Term: presentation assertion
Refers to amounts and disclosures being appropriately aggregated or disaggregated, described clearly, and presented as per the applicable framework.

Assertions about Account Balances at Period End

Relevant to balances such as inventory, receivables, or payables at the end of the period:

• Existence: Assets, liabilities, and equity interests exist.
• Rights and Obligations: The entity holds or controls rights to assets and owes obligations for liabilities.
• Completeness: All balances that should be recorded are included.
• Accuracy, Valuation, and Allocation: Balances are included at appropriate amounts; any adjustments are correctly made.
• Classification: Balances are properly classified in the accounts.
• Presentation: Balances and disclosures are relevant and understandable.

Key Term: existence assertion
Asserts that assets, liabilities, and equity interests shown in the financial statements exist at the reporting date.

Key Term: rights and obligations assertion
Confirms the entity owns or controls the assets and is responsible for the liabilities presented.

Key Term: valuation assertion
States that assets and liabilities are recognised at appropriate amounts, including any adjustments for fair value, impairment, or allocation.

Assertions about Disclosures

Assertions also apply to presentation and disclosures in the notes:

• Occurrence, Rights, and Obligations: Disclosed events, transactions, and other matters have occurred and pertain to the entity.
• Completeness: All disclosures required have been included.
• Classification and Understandability: Disclosures are appropriately grouped and clearly described.
• Accuracy and Valuation: Disclosed information is accurate and at appropriate amounts.

Relating Assertions to Audit Procedures

Audit evidence must align with the assertion at risk of material misstatement. Each procedure is chosen to address specific assertions.

Directional Testing

The technique for choosing the direction of your test is essential for matching procedures to assertions:

• Tracing from source documents (e.g., invoices, GRNs) to the accounting records tests completeness—ensuring nothing is omitted.
• Vouching from the accounting records to supporting documents tests existence/occurrence—what is recorded actually happened.

Key Term: directional testing
An audit approach that chooses the direction of testing based on whether overstatement or understatement is the main risk, thus aligning audit procedures with relevant assertions.

Worked Example 1.1

Scenario:
The auditor is concerned that sales might be understated at year-end. Which assertion is at risk, and which procedure would best address it?

Answer:
Completeness is at risk. The auditor should trace a sample of despatch notes (evidence of goods shipped) to sales invoices and the sales ledger to confirm all goods despatched are invoiced and recorded as revenue.

Selecting Procedures for Assertions

Match the routine audit tests to assertions as follows:

Worked Example 1.2

Scenario:
The auditor inspects supplier statements to ensure payables are complete at year-end. What assertion is being tested and why is the evidence appropriate?

Answer:
The completeness assertion is tested, as supplier statements may reveal invoices not yet entered in the accounts. External documents from suppliers provide reliable evidence to detect under-recording of liabilities.

Evaluating Evidence: Sufficiency and Appropriateness

To conclude on assertions, auditors assess:

• Sufficiency: The amount of evidence—impacted by materiality and risk.
• Appropriateness: The quality—relevance and reliability to the assertion.

Procedures differ in reliability:

• External confirmations (e.g., from banks or customers) are stronger than documents originating from the client.
• Written and original documents are superior to oral and copied evidence.

Key Term: sufficient appropriate evidence
Enough quality and quantity of audit evidence necessary to provide a basis for the audit opinion.

Worked Example 1.3

Scenario:
For inventory valuation, the auditor relies on management's estimate of net realisable value compared to cost. What steps increase the reliability of evidence for the valuation assertion?

Answer:
Review supporting sales invoices after year-end for related items, test calculations of NRV, examine correspondence on obsolete/damaged stock, and corroborate with industry price data to strengthen the quality of evidence for correct valuation.

Exam Warning

Overlooking the distinction between existence and completeness can lead to incorrect audit procedures. When designing your tests, clarify if your direction targets items not recorded (completeness) or questions the reality of what has been recorded (existence/occurrence).

Summary

Understanding assertions is key to targeting audit procedures. Assertions guide the auditor to design suitable tests—for example, focusing on existence for assets prone to overstatement or on completeness for liabilities. The auditor then selects and performs audit procedures providing evidence linked directly to those assertions. The sufficiency and appropriateness of evidence depend on both the risk and the quality of the sources.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify and define types of assertions for transactions, balances, and disclosures.
• Link audit assertions to relevant procedures and sources of evidence.
• Differentiate between testing for existence/occurrence and completeness through directional testing.
• Understand how sufficiency and appropriateness of evidence are determined by assertion and risk.
• Recognise the importance of matching audit tests to the assertion at risk of material misstatement.

Key Terms and Concepts

• assertion
• occurrence assertion
• completeness assertion
• accuracy assertion
• cut-off assertion
• classification assertion
• presentation assertion
• existence assertion
• rights and obligations assertion
• valuation assertion
• directional testing
• sufficient appropriate evidence