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Introduction To Financial Statement Audit and Management Assertions

Financial statements provide essential financial information to external users for decision making. An audit is conducted to systematically gather evidence to evaluate management's assertions in the financial statements and determine if they are presented fairly according to standards. The auditor communicates their opinion on the fairness of the financial statements to interested users such as investors and creditors to enhance the reliability of the information.

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Introduction To Financial Statement Audit and Management Assertions

Financial statements provide essential financial information to external users for decision making. An audit is conducted to systematically gather evidence to evaluate management's assertions in the financial statements and determine if they are presented fairly according to standards. The auditor communicates their opinion on the fairness of the financial statements to interested users such as investors and creditors to enhance the reliability of the information.

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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Introduction to Financial Statement Audit and Management

Assertions

Financial statements are the end product of the accounting


process. It includes the statement of financial position, statement of
financial performance (or statement of comprehensive income),
statement of cash flows. Statement of changes in equity and
accompanying notes.

Financial information provided by financial statements is a crucial


factor in the decision making process, especially by the external
users of financial information. Since these users are external to the
entity preparing financial statements, they lack control on the
reliability of the information provided.

Auditing defined

Auditing is “a systematic process of objectively obtaining and


evaluating evidence regarding assertions about economic actions
and events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the
results to the interested users.”

Two processes of auditing:

a) Investigative process – involves the systematic gathering


and evaluation of evidence as a basis for determining
whether assertions made by responsible person correspond
with the established criteria

b) Reporting process – involves communicating the audit


opinion to interested users

Important Concepts:

1) Systematic process – auditing involves structured/logical


series of sequential steps or procedures known as the audit
process

2) Objectively obtaining and evaluating evidence – auditing


involves gathering and evaluating sufficient appropriate audit
evidence that will support the auditor’s opinion

 Objectivity refers to the combination of impartiality,


intellectual honesty and freedom from conflicts of interest.
 Audit evidence is the information obtained by the auditor in
arriving at the conclusions on which the audit opinion is
based.

3) Assertions about economic actions and events – assertions


are the subject matter of auditing

 In the context of audit of financial statements, assertions


are representations of management, explicit or otherwise,
that are embodied in the financial statements. Assertions
include the accounts, balances/amounts and disclosures
appearing on the face of the financial statements (and in
the notes to financial statements) and which the
management claims to be free of misstatements.
 Audit evidence gathered and evaluated by the auditor may
support or contradict the assertions of management.

4) Established criteria – the standards or benchmarks that are


needed to judge the validity of the assertions on the financial
statements

 In the context of audit of financial statements, the


established criteria are the applicable financial reporting
framework (for example, the PFRS).

5. Ascertain the degree of correspondence between assertions


and established criteria – The auditor’s objective is to
determine whether the assertions conform with established
criteria, that is, whether the financial statements are
prepared, in all material respects, in accordance with the
applicable financial reporting framework (such as the PFRS).

6. Communicating the results to the interested users – The


ultimate objective of audit is the communication of audit
findings/opinion on the fairness of the financial statements to
interested users.

 Communicating results is achieved through issuance of a


written audit report which contains the audit opinion (or
disclaimer of opinion).

Interested users are the wide variety of financial statements users


who rely on the auditor’s opinion such as the stockholders,
creditors, potential investors and creditors, management,
government agencies, and the public (in general).

There are different types of audit. But the most common type of
audit is a financial statement audit. Financial statement audit is
an audit conducted to determine whether the financial statements
of an entity are fairly presented in accordance with an identified
financial reporting framework (or PFRS)

Purpose of Financial Statement Audit

The primary economic reason for an audit of financial statements is


the demand by external users for reliable or fairly stated financial
statements that they will use in making economic decisions. Thus,
the market for auditing services is driven by demand by external
financial statements users.

An audit can help reduce information risk, that is, the risk that the
financial statements that will be used for decision-making are
materially misleading, unreliable or inaccurate.

The purpose of an audit is to enhance the degree of confidence of


intended users in the financial statements. Such purpose is
achieved by the expression of an opinion by the auditor on whether
the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.

Management’s Assertions on the Financial Statements

Financial statements are a structured representation of historical


financial information (including related notes which comprise a
summary of significant accounting policies and other explanatory
information), intended to communicate an entity’s economic
resources or obligations at a point in time or the changes therein
for a period of time in accordance with a financial reporting
framework.

Assertions are representations of management, explicit or


otherwise, that are embodied in the financial statements.
Assertions include the accounts, balances/amounts and
disclosures appearing on the face of the financial statements (and
in the notes to financial statements) and which the management
claims to be free of misstatements.

Financial statements are primarily the responsibility of the entity’s


management who makes the following assertions:

 existence or occurrence of transactions that result to


reported assets, liabilities and equity at the reporting date
and income and expenses for the reporting period.

 completeness of information presented in the financial


statements that are the results the transactions and other
events that actually occurred during the reporting period.

 rights or control over all reported assets, and


obligations for reported liabilities at the reporting period

 appropriate use of measurement bases for assets,


liabilities, and equity and recognition of income and
expenses in accordance with the revenue and expense
recognition principles applicable; and

 appropriate presentation and disclosure of all financial


statement components and accompanying notes to the
financial statements to the effect that the substance and
not merely the legal form of the recorded transactions is
communicated to the users.

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