Assertions

Welcome back. This is Talk 3 about the introduction to auditing from David Hay of The University of Auckland. Today, we're going to talk about what auditors look specifically at, and what they look at more specifically is the assertions that make up financial statements, and they look at items that are material. Let's look at the assertions once again.

The financial statements are made up of different types of statements and they include the different accounting items in them; assets, liabilities, equity, revenue, expenses, and so on. What auditors do is think about the financial statements in a little bit more detail than most people do. They're looking at assertions that relate to each of those items. Each item in the financial statements is basically a set of assertions that management are saying when they put something in.

Let's look at the financial statements. For example, let's look at the financial statements for transactions and events. These include things such as revenue and expenses. When management include revenue in the financial statements, they're basically making all of these assertions. They're saying that revenue occurred. It's real revenue that is related to the company. They're asserting that revenue is complete. The completeness assertion. All of the revenue that happened made it into the financial statements. In accuracy, it's accurately calculated. It's in the right currency. It's correctly added up. That's completeness. And the cut-off assertion, cut-off means it's in the right period. It could make a huge difference if they put some of last year's sales into this year's accounts or next year's sales, and that's called the cut-off assertion. That kind of error can frequently happen. Classification, this is the right place in the financial statements. That can be very important for some transactions. Say expense items, are they part of the cost of goods sold or are they part of management expenses? They've got to be in the right place. That's very important for financial analysts. Presentation, is everything disclosed in the financial statements the way it should be according to the financial reporting standards? Auditing involves breaking down each financial statement item and looking at it in detail by assertions. Now, the assertions in that list, they do overlap a little bit. Cut-off assertion, in particular, overlaps a lot with occurrence and completeness. But it's so important that it gets its own assertion. So that's the transactions and events assertions. For balance sheet items, we've got a slightly different list. Account balances.