Using ASSERTIONS on the audit - examples of application

Summary

In this video, Amanda, a university auditing professor, explains the importance of assertions in auditing, particularly in evaluating internal controls and testing for financial misstatements. She covers how assertions like existence, accuracy, completeness, rights, obligations, and presentation apply to balance sheet items, using Apple’s iPad inventory as an example. Amanda emphasizes the role of risk in determining the focus of audit tests, and encourages viewers to engage with an interactive tool for testing knowledge on assertions. She also promotes her audit study guide and invites feedback from the community.

Takeaways

• 😀 Assertions are characteristics used to determine if financial statements are free from material misstatement.
• 😀 The term 'true and fair' is replaced with 'free from material misstatement' in the context of audits.
• 😀 Internal controls are evaluated using assertions to ensure each assertion has a matching control to prevent misstatements.
• 😀 If an assertion does not have a corresponding internal control, it indicates a potential weakness in the system.
• 😀 Evidence must be collected on all assertions, including whether assets, liabilities, and equity are properly recorded, classified, and disclosed.
• 😀 Not all assertions require equal amounts of testing. Risk is used to prioritize assertions for substantive testing.
• 😀 Understanding the client’s industry and management behavior helps auditors assess the risk of misstatement.
• 😀 Assertions are applied to specific balance sheet items, such as ensuring inventory like iPads exists and is recorded accurately.
• 😀 The five key assertions for assets include existence, accuracy, completeness, rights and obligations, and presentation.
• 😀 Completeness tests focus on ensuring all inventory is recorded, and rights and obligations focus on ownership or control of assets.
• 😀 A tool called 'Para' is introduced to help test knowledge of assertions through an interactive text-message style quiz.

Q & A

What is the main purpose of using assertions in auditing?

Assertions are used to assess whether financial statements are free from material misstatement. They help auditors determine if financial statements are true and fair by evaluating the existence, accuracy, and completeness of recorded items.

How do assertions relate to evaluating internal controls in an audit?

Assertions are used to identify the key characteristics needed for financial statements to be free from misstatement. Auditors then check whether there are internal controls in place that align with each assertion, such as ensuring transactions occur, are recorded accurately, and classified correctly.

Why is it important to match internal controls with assertions?

If there is an assertion without a corresponding internal control, it indicates a potential weakness in the system. This gap can lead to the risk of material misstatements being introduced into the financial statements, whether intentionally or accidentally.

What role does risk play in auditing assertions?

In auditing, risk determines where auditors should focus their efforts. Some assertions might carry more risk than others, requiring auditors to spend more time on areas with a higher chance of misstatement. Auditors evaluate the risk based on industry knowledge and client behavior.

How do auditors determine which assertions are higher or lower risk?

Auditors assess the risk based on their understanding of the client, including potential incentives or pressures to misstate financial statements. This understanding helps identify which assertions may be more prone to misstatements, influencing the amount of testing required.

What is the significance of 'existence' when applying assertions to assets?

The 'existence' assertion ensures that the assets listed on the balance sheet, such as iPads in an inventory example, are real and physically present. For instance, auditors will confirm that the stated number of iPads are actually in stock and available for sale.

What is the 'accuracy' assertion, and how does it relate to asset valuation?

The 'accuracy' assertion ensures that an asset is recorded at the correct value. For example, when valuing iPads, auditors will check whether the cost calculation includes all relevant components such as materials, labor, and overhead, and whether there are any obsolete items that should be written off.

What is meant by the 'completeness' assertion in auditing inventory?

The 'completeness' assertion ensures that all inventory is recorded in the financial statements. Auditors will verify that no items are omitted, such as by comparing inventory levels with production records or conducting physical counts.

Why is the 'rights and obligations' assertion particularly important for assets?

The 'rights and obligations' assertion verifies whether the company actually owns the asset it claims, such as iPads. This ensures that the asset is rightfully recorded on the balance sheet and not mistakenly claimed by the company without ownership.

What is the purpose of the 'presentation' assertion in financial statements?

The 'presentation' assertion ensures that all financial information is disclosed correctly, with appropriate notes and classifications. For example, auditors check that inventory items are not only listed correctly but that the related disclosures are accurate and comply with accounting standards.