Audit Assertions & SOC Reports: How Are They Related?


Management assertions fall into the following three classifications. These are a few of the financial metrics which analysts and investors commonly use to evaluate the company stocks. They are the official statement that the figures reported are a truthful presentation of the company’s assets and liabilities following the applicable standards for recognition and measurement of such figures.

  • This helps ensure that the financial statements in question comply with accounting standards and regulations.
  • However, prior to issuing your report, what are at least five other procedures or reviews that must be performed?
  • Completeness – All transactions and accounts that should be presented in the financial statements are so included.
  • The final financial statement assertion is presentation and disclosure.

As with completeness, auditors use cut-off to determine transactions are recorded within the proper accounting period. Cut-off has special significance when reviewing payroll and inventory levels. It’s critically important for all transactions in a given accounting period to be recorded properly.

Understanding Audit Assertions and Why They’re Important

An auditor needs to check the validity of those assertions. The final financial statement assertion is presentation and disclosure. This is the assertion that all appropriate information and disclosures are included in a company’s statements and all the information presented in the statements is fair and easy to understand. This assertion may also be categorized as an understandability assertion. The rights and obligations assertion states that the company owns and has the ownership rights or usage rights to all recognized assets. For liabilities, it is an assertion that all liabilities listed on a financial statement belong to the company and not to a third party.


Checking payroll records to ensure the expense account for salaries and wages does not include any unauthorized amounts. Auditors may look at other assets as well to determine whether they are the property of the business or are just being used by the business. Liabilities are another area that auditors will review to determine that any bills paid from the business belong to the business and not the owner. Inventory is another area that auditors may review to determine that inventory is properly valued and recorded using the appropriate valuation methods. Completeness, like existence, may examine bank statements and other banking records to determine that all deposits that have been made for the current period have been recorded by management on a timely basis. Auditors may also look for any deposits in the bank that have not been recorded.

The “existence” assertion is a primary focus of inventory observation audit procedures. What…

Also known as management assertions or financial statement assertions, audit assertions are the claims made by management certifying the financial statements presented are complete and accurate. They may be explicit (i.e., stated directly) or implicit (i.e., implied rather than directly stated). Businesses and nonprofits regularly prepare their balance sheet, income statement, etc. at the end of an accounting period to provide a clear, correct, and complete record of their financial standing.

Put simply, the company confirms that it has legal authority and control of all the rights and obligations highlighted in the financial statements. This assertion attests to the fact that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s entire inventory is included in the total inventory figure appearing on a financial statement. When performing an audit, it is the auditor’s job to obtain the necessary evidence to verify the assertions made in the financial statements. Whether you’re using accounting software or recording transactions in multiple ledgers, the audit assertion process remains the same. Whether you’re with a Fortune 500 company, a nonprofit, or are a small business owner, any time you prepare financial statements, you are asserting their accuracy.

auditing procedures

Deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts. Occurrence Assertion – Transactions and events disclosed in the financial statements have occurred and relate to the entity. Completeness Assertion – All transactions that were supposed to be recorded have been recognized in the financial statements. The following lists the types of audit assertions in the three areas of a financial audit. One would expect these assertion examples to be addressed in an audit. Each also provides the assertion meaning or definition to help one understand how each is used in an assessment.

When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. When financial statements are prepared, the preparer is asserting the fundamental accuracy of those statements. Learn what the various audit assertions are and how they can impact your business. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.

Key Audit Areas to save the world!

There is no assurance that controls were operating effectively over a period of time. For additional information, check out our blog on SOC Report Types . Accuracy & Valuation Assertion – Transactions, events, balances, and other financial matters have been disclosed accurately at their appropriate amounts. Classification Assertion – Transactions have been classified and presented fairly in the financial statements. Cut-off Assertion – Transactions have been recognized in the correct accounting periods.

audit of financial

This financial assertion states that the different components of a financial statement, such as assets, liabilities, revenues, and expenses, have all been properly classified within the statement. One of the ways to test this assertion is to redo all the calculations. Assertions are made to attest to the authenticity of information on balance sheets, income statements, and cash flow statements. Evaluating the accounts receivable aging report to determine when, or if, outstanding balances will be paid.

These assertions are the basis on which the reliability and integrity of the financial statements are evaluated. The audit assertions are primarily regarding the correctness of the different elements of the financial statements and a company’s disclosures. Audit Assertions are also referred to as Financial Statement Assertions and Management Assertions.

Rights and obligations

Take the time to familiarize yourself with the different types of audit assertions and how analytical procedures used to test them helps establish the truthful disclosure of a company’s financial standing. By doing so, you’ll be well-prepared to face the audit procedure with financial information that’s compliant, complete, and correct. Stakeholders will get the clear understanding they need, and your team will have useful and accurate data they can rely on for effective financial planning and decision making. Confirming all recorded transactions and other information presented in financial statements meet accounting standards for completeness and accuracy.

The same process is used when verifying accounts receivable balances. The first assertion an auditor will review is to check to make sure the asset or liability exists. To assess existence, an auditor will view tangible assets and obtain paperwork showing that the business has committed to certain obligations. If necessary, the auditor may double-check liabilities and call the other party to ensure that obligation exists. When management prepares financial statements, it makes certain assertions that an investor has to assume to be true for the financial statements to be useful.

For example, an auditor may want to examine payroll records to make sure that all salaries and wages expenses have been recorded in the proper period. This may include an examination of payroll records, a payroll journal, an active employee list, and any payroll accruals that were made and reversed in the period being examined. Completeness helps auditors verify that all transactions for the period being examined have been properly entered in the correct period. Amounts and other data relating to recorded transactions and events have been recorded appropriately. The assertion is that all asset, liability, and equity balances have been recorded at their proper valuations.

To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor’s opinion is based. As the quality of the evidence increases, the need for additional corroborating evidence decreases. Obtaining more of the same type of audit evidence, however, cannot compensate for the poor quality of that evidence. The following auditing standard is not the current version and does not reflect any amendments effective on or after December 31, 2016. The current version of the auditing standards can be found here. The company has all the rights & obligations in relation to the said plant & machinery (i.e. rights & obligation assertion).

  • Financial statements are written records that convey the business activities and the financial performance of a company.
  • The assertion is that all information disclosed is in the correct amounts, and which reflect their proper values.
  • Goodwill is an intangible asset recorded when one company acquires another.
  • Stakeholders will get the clear understanding they need, and your team will have useful and accurate data they can rely on for effective financial planning and decision making.
  • Meaning, cash balance can be in excess of what is being disclosed.

Cross-checking accounts receivable balances with sales records to confirm a sale happened on the date listed. Verifying all salaries and wages are fully recorded in the proper accounts and correct accounting period. Issued by the International Accounting Standards Board , the purpose of the IFRS is to provide a consistent, comprehensive set of transparent and globally applicable accounting auditing standards. All disclosures that should have been included in the financial statements have been included.

Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance. It pertains to the confirmation that the entity has the right to ownership of the assets and obligations for the liabilities recorded in the financial statements. The auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.

Management assertions are claims regarding the condition of the business organization in terms of its operations, financial results, and compliance with laws and regulations. The role of the auditors is to analyze the underlying facts to decide whether information provided by management is fairly presented. Auditors design audit tests to analyze information in order to determine whether management’s assertions are valid. To accomplish this, audit tests are created to address general audit objectives. Each audit objective relates to one of management’s assertions.

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When a business is audited, the reviewer job is to ensure that management’s assertions in the financial statements are verifiably true. To assess the validity of these claims, the auditor will conduct relevant tests such as reviewing invoices and viewing the items in question. When it comes to auditing balance sheet accounts, such as long-term assets and liabilities, the key assertions that an auditor will test are existence; rights and obligations; completeness and valuation. While assertions are made in all aspects of life, in an accounting or business setting, most people think of a company’s financial statements, or the audit of the financial statements, when they think of assertions. These representations are commonly referred to as Audit Assertions, Management Assertions, and Financial Statement Assertions.

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Isaac enjoys helping his clients understand and simplify their compliance activities. He is attentive to his clients’ needs and works meticulously to ensure that each examination and report meets professional standards. Occurrence Assertion – Transactions recognized in the financial statements have occurred and relate to the entity. How are the analytical procedures used in an audit engagement? What premise underlies the use of analytical procedures in auditing? What sources of information can an auditor use to develop expectations?

The purpose of an audit procedure determines whether it is a risk assessment procedure, test of controls, or substantive procedure. Completeness – All transactions and accounts that should be presented in the financial statements are so included. Valuation assertion says that the value should be as per the relevant accounting framework. Few accounting standards also require a provision in case of unrealized loss.

If all the 501c3 meaning are true, the statements should provide an adequate picture of the financial status of the business. Rights & Obligations Assertion – Entity has the right to ownership or use of the recognized assets, and the liabilities recognized in the financial statements represent the obligations of the entity. It is possible that this balance actually exist and entity has all necessary rights over it but it lacks completeness. Meaning, cash balance can be in excess of what is being disclosed. In other words, management assertions are the features/attributes of financial figures which management is trying to tell via their financial statements. It refers to the presentation of all the transactions and the disclosure of all the events in the financial statements and confirms that they have occurred and are related to the entity.

8/ AU sec. 331, Inventories, establishes requirements regarding observation of the counting of inventory. Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly. Check whether any expense is claimed as an asset that does not fit the criteria of capitalization. All existing plant & machineries are captured in the figure of $ 250 million (i.e. completeness assertion). Management has some measurement basis for arriving at the value of $ 250 million (i.e. valuation assertion).

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There are generally five accounting assertions that the preparers of financial statements make. They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. There are three areas of assertions in financial accounting. Some people may refer to these as audit assertions as they are evaluated during an audit of an entity’s financial statements. Auditors will employ a wide variety of procedures to test a company’s financial statements with respect to each of these assertions.

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