Financial statement assertions
/What are Financial Statement Assertions?
Financial statement assertions are claims made by an organization's management regarding its financial statements. The assertions form a theoretical basis from which external auditors develop a set of audit procedures. These assertions are noted below.
Accuracy Assertion
All of the information contained within the financial statements has been accurately recorded. This also means that accounting transactions have been properly classified within the financial statements, such as into the asset, liability, equity, revenue, and expense classifications.
Completeness Assertion
All of the information that should be disclosed has been included within the financial statements and accompanying footnotes, so that readers have a complete picture of the results and financial position of the entity.
Cut-Off Assertion
Transactions have been compiled into the correct reporting period.
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Existence Assertion
The information recorded in the financial statements actually occurred during the year; fraudulent transactions are most likely to violate this assertion.
Rights and Obligations Assertion
The entity is entitled to the assets it is reporting, and is reporting all of its obligations as liabilities. This can be an issue when an organization has poor procedures for ensuring that all transactions are properly recorded.
Understandability Assertion
The information contained within the financial statements has been clearly presented, with no intent to obfuscate the results or financial position of the entity. This is a particular concern when the reporting entity is having difficulty attaining its projected results, and so turns to obfuscation to muddy the reporting of whether it has actually achieved those results.
Valuation Assertion
The transactions that are summarized in the financial statements were properly valued; this is a particular concern when transactions must be either initially or subsequently recorded at their market value. Recordation at market value is most common for assets classified as current assets, such as marketable securities.
If audit procedures result in a conclusion that any of the preceding assertions are not correct, then the auditors may need to conduct additional audit procedures, or they may not be able to provide a clean audit opinion at all.
If management is committing fraud in generating financial statements, it is possible that all of the preceding assertions will prove to be false.