The overall objective of an examination of the financial statements is to render an opinion as to the fairness of the financial statements in conformity with the “Generally Accepted Accounting Principles (GAAP).” In order to render an opinion the auditor has to gather and evaluate certain information called audit evidence.
Meaning: “Audit Evidence” is a mixture of observations made by audit inquiry and data compiled via analysis of other data which, when combined, enables the auditor to from and substantiate an opinion on financial statement.
Audit separates all the confirmations that the auditor has obtained and that
(a) Is relevant to what the auditor is trying to determine.
(b) Influences the auditor in formulating an opinion as to fairness of the financial statements.
Assertion by Management
Financial statements assertions are the representations of the directors that are embodied in the financial statements. The directors by approving the financial statements are making representations about the information thereon. So every item in the financial statements constitutes one or more assertions from the management.
Examples
a. If there is an item in the current assets section of the balance sheet which states as: Cash Rs. 1, 00,000.
In this case the management’s assertions are:
- Company has cash in hand of Rs. 1, 00, 000.
- Asset cash is free and available for expenditure as the management directs.
b. Like wise an item is states as:
Accounts Receivables Rs. 3, 00,000 asserts that:
- company has accounts receivable from its customers of Rs. 3, 00, 000.
- such accounts are considered collectible within the operating cycle
- they are expected to receive Rs. 3, 00, 000 in cash or an amount very close to it from the debtors who purchased goods on credit.
Management produces financial statements and in doing so it asserts that the individual items are correctly described and show figures which are mathematically correct or fairly estimated. Further, the accounts are a whole show, a trace and fair view of financial state of affairs of the concerned enterprises.
The assertion of representations that are usually made are in this connection are:
a. Existence: An asset or a liability exists on the date of balance sheet.
This is an obvious assertion in respect of items like land, building, merchandise and others.
b. Rights and obligations: An asset or liability pertains to the entity on the date of balance sheet.
The enterprise has ownership of an asset i.e. it has all sorts of rights and obligations relating to a given asset or liability.
c. Occurrence: A financial transaction or event took place which pertains to the entity during the relevant accounting period. Even when false transaction have been recorded, the assertion is that all record transactions actually took place.
d. Completeness: There are no unrecorded assets, liabilities, transactions or events or undisclosed financial items.
This is essential for all items of balance sheet but is particularly important in respect of liabilities.
e. Valuation: An asset or liability is recorded at an appropriate carrying value. Appropriate means it is in accordance with the generally accepted accounting principles, Companies Ordinance and Accounting Standards.
f. Measurement: A transaction or event is recorded as the proper amount and revenue or expense allocated to the proper period.
g. Presentation and disclosure: An item is disclosed, classified and described in accordance with applicable reporting framework.
Example: An overdraft of Rs. 80,000 appears in a balance sheet. So the directors are made the following assertions:
1. There exists a liability to companies’ bankers.
2. In balance sheet data the liability of Rs. 80,000 is exhibited.
3. The said amount is agreed by bank.
4. Overdraft was payable on demand.
5. Overdraft was unsecured.
6. Memorandum and Articles of Association authorise borrowings.
7. Bank reconciliation statement has been prepared.
8. Bank is willing to allow the overdraft to continue.
Notice that if no overdraft appears in the balance sheet, there is an assertion that on the date of balance sheet no overdraft liability existed.
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