Management assertions often become nightmarish for people responsible for their preparation. They are used in auditing to ensure which financial records and disclosures are correct. If the audit shows any mistakes, it may cause problems for the company.
In the article, you will find out the definition of management assertions and how vital assertions are to a business.
Understanding Management Assertions
Management assertions, or in other words, financial statement assertions, are claims made by the company’s management related to specific business aspects. Such claims include the measurement, recognition, disclosure, and presentation of financial information about the company’s statements.
The auditor must prove the management prepared assertions which can be confirmed. During an internal audit, auditors pay attention to any detail to detect fraud, so it’s critical to prepare financial statement assertions correctly to pass the auditors’ test.
Typically, financial statement assertions fall into the following three categories:
- transaction-level assertions;
- account balance assertions;
- presentation & disclosure assertions.
Assertions have major differences, and accountants need to ensure everything is prepared correctly.
Assertions and Auditing
During audits, officials use specific characteristics to test whether financial records and disclosures are correct and appropriate. Such characteristics are assertions. If the company meets assertions on paper, financial statements are recorded correctly.
The IFRS (International Financial Reporting Standards) discloses accounting standards accepted by the IASB (International Accounting Standards Board). The IFRS offers generally accepted standards for accounting rules that are transparent, comparable, and consistent.
The IFRS provides companies with the ISA315 standard which includes categories of assertions used to check financial records. Companies have to meet such standards to pass audits. Similarly, auditors use these standards to test the company’s financial statements. Let’s check these categories in detail.
These are assertions related to financial transactions, business events, correct accounts in the general ledger, etc. The accountant must record these assertions without errors and during the correct reporting period.
Accounting recognizes these five items as assertions related to transactions:
- Accuracy. An accountant must record full amounts of transactions without making any errors.
- Completeness. The accountant must correctly add all business events related to the company.
- Classification. The accountant must add all transactions to the general ledger. Transactions must contain full accounts.
- Cutoff. The accountant adds all transactions within the appropriate recording period.
- Occurrence. The company must show evidence that all business transactions occurred in reality.
It’s just the first type of management assertion, but accountants must make sure they record transactions according to all requirements.
Account Balance Assertions
These four items are categorized as assertions related to the ending balances in accounts:
- Existence. All account balances exist for assets, liabilities, and the shareholder’s equity.
- Completeness. All asset, liability, and equity balances that an accountant reports in full volumes.
- Valuation. The company recorded all asset, liability, and equity balances at their correct valuations.
- Rights and obligations. The accountant records the entity with the rights to the assets it owns. The entity is obligated according to the liabilities a company reports.
These mentioned four items are related to the balance sheet.
Presentation & Disclosure Assertions
These five items are categorized as assertions related to the data presented within the financial statements and all accompanying disclosures:
- Completeness. The accountant discloses all transactions that the company must disclose.
- Accuracy. The company proves that all data it discloses is in the correct amounts. It should also show proper values.
- Occurrence. The company should disclose transactions that have occurred.
- Rights and obligations. The company discloses rights and obligations that indeed relate to the entity it reports.
- Understandability. The company must prove that information it includes in the financial statement is presented correctly and understandably.
Given these three types of management assertions have duplications, one might assume they are identical. However, each assertion has its goal and aims at different aspects of the financial statement.
The first management assertion is related to the income statement, the second type is to the balance sheet, and the third is to the accompanying disclosures. That’s why companies’ management must pay attention when preparing management assertions.
Why Are Management Assertions Important?
Typically, assertions are used in auditing. It’s the only reasonable method to check whether financial statements are factual or not, in correct amounts, etc. Overall, assertions reflect that the statement is believed to be true by the speaker. However, one must use means to determine whether a specific assertion is true.
In auditing, it’s hard to figure out whether specific financial information is 100% free of errors. That’s why assertions are key to determining what data is true. Assertions help in audits of financial records.
Author: Charles Lutwidge