Assertions used in Audit Testing
There have been miniscule changes post revision of ISA 315 in 2016
to assertions, however confusion still exists whether the assertions should be
continued and categorised in three classes or should there be only two.
To make things simple, have given assertions under respective classes
that should be used susbsequent to the revision.
Transaction Assertions:
Occurrence – To ensure
transactions recorded or disclosed actually took place and relate to the
entity. Basic test to check if transactions are genuine and not under/over
stated.
E.g. – In
case of purchases, check if goods were ordered and received. Preferably
this test should start from entries in the ledger and should be sourced to the
origin. Select a sample of entries from purchase account and trace to the
appropriate purchase invoice, goods received note (GRN) and purchase
order.
Completeness – To verify
if all transactions have been recorded and disclosed, none of them is
missing.
E.g. – Always ensure
this test starts from the origin. If you are checking sales, you need to start
from Order Book right upto goods despatch notes (GDN) and in books of accounts
from sales invoice to the posting in Debtors ledger account.
Accuracy – To
ascertain that there were no errors in posting or documentation. There should
not be any misstatement in numbers, its measurement or disclosure.
E.g. – Casting
checks, review of reconciliations, verifying monthly totals with summary,
invoices checks, etc, are some of the test conducted to verify accuracy.
Cut–off – To
ensure transactions are recorded in the relevant accounting period.
E.g. – Verifying GRN or
GDN in the begining and end of the accounting year to ensure purchases and
sales invoices, though raised in different periods, were received and
despatched in the relevant accounting period vis-a-vis its ownership.
Presentation – To
ascertain if the nomenclature used correctly describes the transaction to
readers of the financial statements.
E.g. – Fees paid to the
auditing firm for various services is shown under different head as Auditors
remuneration and fees for non-audit services. Outstanding to Lenders is
segregated into payable in a year, 1-2 years, 3-5 years and above.
Classification – To verify if the
account head used are appropriate for the transactions recorded..
E.g. – Interest income
is not shown as sales or labour charges which are direct cost not accounted as
salaries under administrative cost.
Account balance Assertions:
Existence – Physical
existences of tangible assets and availability of documentation to confirm
monetary value of intangible assets.
E.g. – Physical verification of
plant and equipment, motor car, bank letter for confirmation of balances,
Debtors circularisation, etc.
Accuracy, valuation and allocation – It deals
with the values provided to assets, liabilities and equity interests. It
also warrants correct and appropriate disclosure including the right allocation
of respective heads of account where amounts are agregated.
E.g. – Valuation
of Investment Property, verification of depreciation/impairment charge on
assets, inclusion of selling cost cost in valuation of inventory, etc.
Completeness – To ensure
there is no under or over statement of assets and/or liabilities.
E.g. –
Verification of Suppliers statements, clearance of reconciliation items post
year end, review of expenditure to ensure capital assets are not expensed out,
etc.
Rights and obligations – To verify
if the entity has an obligation to pay a liability or legal title to an
asset.
E.g. – Reviewing
title deeds for ownership of property, Loans to be verified with Lender
agreements, confirmation from Legal/Counsel on pending court cases, etc.
Presentation – To
ascertain if the nomenclature used correctly describes the nature of the asset
and/or liability to the reader of financial statements.
E.g. – Purchase or
disposal of assets, current or non-current asset/liability, secured debts
disclosure, etc.
Classification – To ensure
Assets and liabilities are disclosed under correct heads.
E.g. – Balances
owed to related parties are not clubbed with Trade Debtors or Creditors, loans
having maturity of <1year are not classified under Creditors outstanding
> 1 year, Cumulative preference shares with fixed terms of redemption are
classified as Debt capital and not Equity capital.
Caveat
Opinions expressed
are those of Mr. Devendraprasad Kankonkar (Deva) as an individual and are his
interpretations of the standards. It has no direct or indirect link with views
expressed by regulators, such as ICAI/ICAEW, of which he is a member. This
material is for general information and does not constitute investment, tax,
legal or other form of advice. You should not rely on this information to make
(or refrain from making) any decisions. Always obtain independent, professional
advice for yourself as the advice may change based on your circumstances.
Resemblance to information on any other site or blog would be just a
co-incidence and unintentional.