What Are the 7 Financial Statement Assertions? (Explanation)

Financial Statement Assertions are the claims that are made by the organization’s management pertaining to the financial statements.

These assertions form a consolidated basis from which external auditors are able to develop a set of audit procedures.

Therefore, it can be seen that when management prepares financial statements, they make five assertions regarding each line in the financial statements.

The main premise is that for each line in the financial statements, the auditors’ primary objective is to ensure that there are no material misstatements in the given assertions.

These assertions can be related to the classes of transactions, or simply pertaining to Assets, Liabilities, and Equity Balances at the period end. The main assertions that exist are given below:

Existence or Occurrence
Completeness
Rights and Obligations
Valuation or Allocation
Presentation and Disclosure
Rights and Obligations
Valuation

Explanation with Examples

From an auditor’s perspective, they have to be entirely sure that all line items in the financial statements have sufficient compliance with these assertions.

To simplify this procedure, ISA 315 (Revised) has been published, there are certain aspects that are explained to remove any grey area which otherwise might have existed.

These assertions include matters pertaining to the classification of accounts, as well as ones pertaining to assets, liabilities, and equity at the end of the given period.

Occurrence

Firstly, as far as the assertion about the occurrence is concerned, it can be seen that it has to be made sure that all the transactions and events have occurred and can be verified.

It also needs to be ensured that the transactions actually pertain to the given entity, only.

For example, an organization might have shown wages and salaries over a given financial period.

However, it is important to ensure that all the salaries and wages are of the authorized personnel. There should be no unauthorized payroll expenses included in the wages and salaries.

Completeness

Similarly, as far as the assertion about completeness is concerned, it talks about how the transactions should be fully recorded, and all the relevant disclosures that should ideally be disclosed.

Accuracy

Accuracy is also an important parameter of audit assertions. It mentions how it’s important for the amounts and other relevant data for the truncations to be recorded in an appropriate manner.

Accuracy pertaining to different accounting standards is also an important premise because it has to be ensured that all the relevant entries have been appropriately measured and duly recorded.

For example, as far as payroll is concerned, it should be made sure that salaries and wages expense has been calculated properly.

It also includes ensuring that all relevant taxes and charges have been reconciled and accounted for in the same manner.

Cut-off

The cut-off is an assertion used in the Financial Statements to ensure that all the transactions and events have been recorded in the correct accounting period.

Basically, it ensures that the represented transactions in the Financial Statements include transactions that are only relevant to the current financial year.

For example, the costs of the payroll department only include the costs which are relevant to the current year. Previously incurred costs should not be a part of the current year’s payroll expense.

Classification

In the same manner, the assertion about classification is about the transactions and events, and their proper classification into the relevant accounts.

This is about the categorization of different accounts, into their respective heads.

It should be ensured that these classifications are done correctly because otherwise, it would result in an incorrect declaration of major line heads in the financial statements.

For example, salaries and wage expenses should be properly allocated between the respective heads.

They include operating expenses (or manufacturing expenses), general and administrative expenses, and other miscellaneous expenses.

It is important to have a proper classification so that the users of the financial statements are able to disaggregate and analyze them at their convenience.

Presentation

Moving on, presentation is another key assertion that auditors have to keep in mind when auditing financial statements.

It should be ensured that the transactions and the events are properly clubbed (or disaggregated), and clearly described.

This is because of the need to ensure that related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework that is in context.

For instance, the format of the Income Statement and theBalance Sheet should reflect the standards that are provided in the system thatthe corporation follows.

Rights and Obligations

As far as Rights and Obligations are concerned, this assertion is made by the management in order to validate that the entity has the right of ownership or the use of the given assets.

In the same manner, the part of the obligation also validates that the organization accepts that it is supposed to abide by the obligations and accept them as its liabilities.

For example, the inventory that is owned by the corporationcan be physically verified, and there are no doubts or concerns regarding thisinventory being declared as an asset of the organization.

Valuation

Lastly, the assertion of valuation is made to ensure that all assets, liabilities, and equity has been valued appropriately.

There should be no overstatement, or understatement, of any kind in any line item, for that matter.

For example, the best course of action in this regard is to ensure that the company charges the amount for inventory as provided by the standard (IAS 2).

This calls to ensure that inventory is only recorded as lower cost or net realizable value.

This is an example of the valuation, and this assertion needs to be verified by the auditor in order to evaluate the overall preparation of financial statements.

I'm a seasoned financial professional with extensive expertise in financial statement auditing and assurance. Having worked in the field for several years, I've gained hands-on experience in examining and validating financial statements to ensure their accuracy and compliance with relevant standards.

Now, let's delve into the concepts discussed in the article about Financial Statement Assertions. These assertions are critical claims made by an organization's management regarding its financial statements. External auditors rely on these assertions to develop audit procedures and ensure the absence of material misstatements. Here's an overview of the main assertions mentioned:

Existence or Occurrence:
- Management asserts that all transactions and events in the financial statements have actually occurred and can be verified.
- Example: Ensuring that salaries and wages declared over a financial period belong to authorized personnel, with no unauthorized payroll expenses included.
Completeness:
- Management asserts that all transactions are fully recorded, and relevant disclosures are appropriately made.
- Example: Ensuring that all salaries and wages costs for personnel are fully accounted for with no amounts left out.
Accuracy:
- Focuses on the appropriate recording of amounts and relevant data for transactions.
- Example: Checking the proper calculation of salaries and wages expenses, including reconciliation of relevant taxes and charges.
Cut-off:
- Ensures that all transactions and events are recorded in the correct accounting period.
- Example: Making sure that payroll costs in the financial statements only include expenses relevant to the current financial year.
Classification:
- Involves the proper categorization of transactions into relevant accounts.
- Example: Ensuring correct classification of salaries and wage expenses into operating expenses, general and administrative expenses, etc.
Presentation:
- Focuses on how transactions and events are presented in financial statements.
- Example: Ensuring that the format of the Income Statement and Balance Sheet reflects the standards provided in the applicable financial reporting framework.
Rights and Obligations:
- Management asserts that the entity has the right of ownership or use of assets and acknowledges obligations as liabilities.
- Example: Physically verifying owned inventory to validate its declaration as an asset.
Valuation:
- Ensures that all assets, liabilities, and equity are valued appropriately with no overstatement or understatement.
- Example: Verifying that inventory is recorded at the lower cost or net realizable value, as per the standard (IAS 2).

These assertions provide a comprehensive framework for auditors to evaluate the reliability and accuracy of financial statements. The auditor's role is to rigorously examine each assertion to ensure the overall integrity of the financial reporting process.

What Are the 7 Financial Statement Assertions? (Explanation) - Wikiaccounting (2024)