Audit procedures and assertions - Assertions for transaction...

Learning Outcomes

After studying this article, you will be able to identify and explain the different audit assertions applied to transactions, account balances, and related disclosures. You will understand the purpose of assertions, how they guide audit procedures, and how to apply them to common audit areas. You will also be able to link assertions to practical audit work in the context of the ACCA FAU exam.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the purpose and application of assertions when obtaining audit evidence. In particular, revision should concentrate on:

• The meaning and importance of assertions in the audit process
• The specific assertions relevant to classes of transactions, account balances, and disclosures
• The link between audit assertions and planned audit procedures
• The types of procedures used to obtain evidence for each assertion
• How audit assertions and supporting procedures impact the testing of transactions, balances, and disclosures in the exam

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 confirms that all sales made have actually occurred and pertain to the audited entity?
2. What is the main difference between the assertion of ‘existence’ and that of ‘completeness’?
3. For bank balances, which assertion does a direct bank confirmation primarily address?
4. Name two audit procedures an auditor can use to provide evidence for the ‘valuation’ assertion relating to inventory.
5. True or False? The ‘presentation’ assertion applies only to notes and disclosures, not to the main financial statements.

Introduction

Assertions are central to the design and performance of audit procedures. Management prepares financial statements claiming these are accurate, complete, and fairly presented—this is achieved through assertions. Auditors test these assertions to obtain sufficient and appropriate evidence as required by auditing standards. Understanding assertions is therefore fundamental to approaching both practical audit work and the ACCA FAU exam.

Key Term: assertion
An explicit or implicit representation by management, embodied in the financial statements, regarding the recognition, measurement, presentation, and disclosure of transactions, balances, and events.

THE ROLE OF ASSERTIONS IN THE AUDIT

Every financial statement item is supported by a series of assertions made by management. Assertions guide auditors when planning procedures and evaluating audit evidence. By mapping audit work directly to relevant assertions, the auditor ensures that all critical risks of misstatement—whether omission, overstatement, or misclassification—are properly addressed.

Assertions are grouped according to their application:

• Assertions about classes of transactions and related disclosures (e.g., sales, purchases)
• Assertions about account balances and related disclosures (e.g., inventory, receivables)
• Assertions about overall presentation and classification

ASSERTIONS FOR CLASSES OF TRANSACTIONS AND EVENTS

The main assertions for transactions and events (and related disclosures) are:

• Occurrence: The transactions recorded have actually taken place and relate to the entity.
• Completeness: All transactions that should have been recorded are included.
• Accuracy: Amounts have been recorded appropriately.
• Cut-off: Transactions are recorded in the correct accounting period.
• Classification: Transactions are recorded in the correct accounts.
• Presentation: Transactions and events are appropriately aggregated or disaggregated, and sufficiently described.

Key Term: occurrence
The assertion that recorded transactions and events took place and pertain to the entity.

Key Term: completeness
The assertion that all transactions and events that should have been recorded are included in the financial statements.

Key Term: accuracy
The assertion that amounts and other data relating to recorded transactions have been recorded properly.

Key Term: cut-off
The assertion that transactions and events have been recorded in the correct accounting period.

Key Term: classification
The assertion that transactions and events have been recorded in the proper accounts.

Key Term: presentation
The assertion that transactions and events are appropriately aggregated or disaggregated, described, and relevantly disclosed.

ASSERTIONS FOR ACCOUNT BALANCES AND RELATED DISCLOSURES

For statement of financial position items (balances and disclosures), assertions are:

• Existence: The assets, liabilities, and equity interests exist at the reporting date.
• Rights and Obligations: The entity holds the rights to assets, and liabilities represent valid obligations at period end.
• Completeness: All assets, liabilities, and equity interests that should have been recorded have been included.
• Accuracy, Valuation & Allocation: The balances are recorded at appropriate amounts, including correct adjustments for valuation or allocation.
• Classification: Assets, liabilities, and equity interests are recorded in the proper accounts.
• Presentation: Items are clearly described, and all related disclosures are relevant and understandable.

Key Term: existence
The assertion that assets, liabilities, and equity interests exist at the reporting period end.

Key Term: rights and obligations
The assertion that the entity owns or controls rights to assets, and that liabilities are the obligations of the entity.

Key Term: accuracy, valuation and allocation
The assertion that balances are included at appropriate amounts, including valuation or allocation adjustments, and are correctly disclosed.

LINKING ASSERTIONS TO AUDIT PROCEDURES

Audit procedures are selected to test specific assertions. A well-structured audit link each procedure directly to a relevant assertion, ensuring that misstatement risks are adequately covered and evidence is gathered efficiently.

Worked Example 1.1

A client’s balance sheet shows trade receivables of £100,000. Which assertion is tested by sending direct confirmation requests to customers, and what other assertion should also be addressed?

Answer:
Sending direct confirmation requests primarily tests the ‘existence’ assertion (do these receivables exist at year end and are owed to the entity?). However, the auditor should also address the ‘rights and obligations’ assertion, confirming that the entity has ownership of these balances and that there are no undisclosed assignments or sales of receivables.

Worked Example 1.2

Inventory is reported at cost of £40,000. What assertions should be considered, and which audit procedures help provide evidence?

Answer:
Relevant assertions are existence (inventory physically exists), rights and obligations (owned by the entity), completeness (all inventory is included), and valuation (recorded at cost or net realisable value). Procedures include attending stock takes (existence and completeness), inspecting recent purchase invoices or sales post year end (valuation), and reviewing consignment records to confirm ownership.

APPLYING ASSERTIONS TO PRACTICAL AUDIT AREAS

Exam Warning

Many students confuse the assertions of ‘existence’ and ‘completeness’. ‘Existence’ asks whether something recorded is real, while ‘completeness’ asks whether everything that should be recorded has been included. Remember: ‘existence’ guards against overstatement; ‘completeness’ guards against understatement.

Revision Tip

When planning audit work, list relevant assertions for each significant item. Use these to structure your audit programs and to answer exam questions efficiently.

Summary

Assertions define what management claims in the financial statements. Auditors design procedures for each relevant assertion, ensuring all potential misstatements are considered. Correctly identifying and testing the assertions is essential for providing audit evidence and is core to the ACCA FAU exam approach.

Key Point Checklist

This article has covered the following key knowledge points:

• The meaning and role of assertions in auditing
• The categories of assertions for transactions, balances, and disclosures
• Application of key assertions to common financial statement areas
• The direct relationship between assertions and audit procedures
• The critical differences and common confusions between main assertions

Key Terms and Concepts

• assertion
• occurrence
• completeness
• accuracy
• cut-off
• classification
• presentation
• existence
• rights and obligations
• accuracy, valuation and allocation