Audit Assertions

Why This Matters

Audit assertions are the foundation of every audit engagement—they're the specific claims management makes about the financial statements that auditors must verify. When you're tested on auditing, you're not just being asked to list assertions; you're being evaluated on your ability to match assertions to audit procedures, identify which assertions carry the highest risk for specific accounts, and explain why certain tests address certain assertions. Understanding the logic behind each assertion transforms rote memorization into practical audit thinking.

These assertions fall into distinct categories based on what is being tested: account balances at period-end, transaction classes during the period, and presentation in the statements themselves. Don't just memorize the nine assertions—know which category each belongs to, what audit evidence addresses it, and how misstatements related to that assertion would distort the financial statements. This conceptual framework is what separates strong exam performance from weak recall.

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Assertions About Existence and Reality

These assertions address the fundamental question: Did this actually happen, and does it actually exist? They protect against overstatement by ensuring reported items are real and transactions genuinely occurred.

Existence

• Confirms assets, liabilities, and equity actually exist at the balance sheet date—this is a balance assertion tested through physical inspection and third-party confirmations
• Primary audit procedures include inventory counts, bank confirmations, and accounts receivable confirmations with customers
• Guards against overstatement—fraudulent schemes often involve recording fictitious assets to inflate financial position

Occurrence

• Verifies that recorded transactions actually took place during the reporting period—this is a transaction assertion distinct from existence
• Tested through vouching—tracing recorded transactions back to source documents like invoices, contracts, and shipping records
• Prevents fictitious revenue—occurrence is the key assertion for revenue fraud, where fake sales inflate income

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Assertions About Completeness and Boundaries

These assertions ensure nothing is missing and everything is recorded in the right period. They protect against understatement—the opposite risk direction from existence and occurrence.

Completeness

• Ensures all transactions and balances that should be recorded are included—the mirror image of existence, guarding against omission rather than fabrication
• Tested through tracing—following source documents forward into the accounting records to confirm they were captured
• Critical for liabilities and expenses—management has incentive to understate obligations, making completeness a high-risk assertion for payables

Cut-off

• Confirms transactions are recorded in the correct accounting period—a timing assertion that affects both the current and subsequent periods
• Focus on period-end transactions—auditors examine sales, purchases, and receipts near year-end to verify proper recognition timing
• Directly impacts revenue recognition—improper cut-off is a common manipulation technique, recording next period's sales early to meet targets

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Assertions About Measurement and Valuation

These assertions address whether recorded amounts are correct—not just whether items exist, but whether they're stated at appropriate values using proper calculations.

Accuracy

• Ensures amounts and data are mathematically correct and properly processed—covers calculations, data entry, and clerical precision
• Tested through recalculation and reperformance—auditors independently verify computations like depreciation, interest, and inventory extensions
• Applies to both transactions and balances—accuracy errors can occur when recording a transaction or when computing period-end amounts

Valuation

• Confirms assets and liabilities are recorded at appropriate amounts per applicable accounting standards—goes beyond mathematical accuracy to measurement basis
• Involves significant judgment—fair value measurements, impairment assessments, and allowance estimates all fall under valuation
• High-risk for complex estimates—accounts like goodwill, investments, and loan loss reserves require extensive valuation testing

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Assertions About Rights and Classification

These assertions confirm the entity's legal relationship to reported items and whether those items are properly categorized in the financial statements.

Rights and Obligations

• Verifies the entity has legal ownership of assets and is legally obligated for liabilities—addresses whether the entity can actually claim what it reports
• Tested through document examination—reviewing titles, deeds, contracts, loan agreements, and lease documents
• Critical for pledged or restricted assets—assets used as collateral or held in trust may exist but not truly "belong" to the entity in an unrestricted sense

Classification

• Ensures transactions are recorded in appropriate accounts and categories—affects how information is organized and interpreted
• Impacts financial analysis ratios—misclassifying operating expenses as capital expenditures distorts both income and asset values
• Includes current vs. non-current distinctions—debt classification errors affect liquidity ratios and covenant compliance

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Assertions About Presentation and Disclosure

This assertion ensures the financial statements communicate information clearly and completely to users, meeting all applicable reporting requirements.

Presentation and Disclosure

• Confirms financial statements comply with GAAP/IFRS presentation requirements and include all required disclosures
• Covers both form and content—proper statement format, note disclosures, and supplementary information must all be evaluated
• Increasingly important for complex transactions—related party transactions, segment reporting, and fair value hierarchies require extensive disclosure testing

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Quick Reference Table

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Self-Check Questions

1. Which two assertions both protect against overstatement but apply to different elements of financial statements (balances vs. transactions)?

2. If an auditor traces shipping documents to recorded sales entries, which assertion is primarily being tested—and why does the direction of testing matter?

3. Compare and contrast accuracy and valuation: How could an inventory balance satisfy the accuracy assertion but fail the valuation assertion?

4. An FRQ describes a company that recorded a sale on December 28 for goods shipped January 3. Which assertion is violated, and what audit procedure would detect this?

5. For accounts payable, why is completeness typically a higher-risk assertion than existence, and what does this imply about the direction of audit testing?