iii. Accuracy—amounts and other data relating to Introduction recorded transactions and events have been
The preparation of financial statements is the recorded appropriately. responsibility of the business management. Hence, the iv. Cutoff—transactions and events have been financial statements contain management’s assertions recorded in the correct accounting period. about the transactions, events and account balances and v. Classification—transactions and events have related disclosures that are required by the applicable been recorded in the proper accounts. accounting standards such as Generally Accepted vi. Presentation—transactions and events are Accounting Principles (GAAP) or International Financial appropriately aggregated or disaggregated and Reporting Standards (IFRS) (Accountinguide, 2020). The clearly described, and related disclosures are purpose of the independent audit is to express an opinion relevant and understandable in the context of the about whether the financial statements prepared by the requirements of the applicable financial reporting business management comply with the IFRSs. The framework. independent auditor should be able to grasp the assertions 2. Management Assertions About Account Balances and made by the client business’ management through the Related Disclosures financial statements in order to determine the audit objectives. The auditor determines the audit objectives and Six management assertions are related to account balances performs the audit work based on the assertions made by and related disclosures, at the period end.
the client business management. i. Existence – assets, liabilities and equity interests
exist. Management Assertions And Audit Objectives ii. Rights and obligations – the entity holds or The responsibility of preparation of the financial controls the rights to assets, and liabilities are the statements and footnotes lies with the management of the obligations of the entity. business. The management assertions can provide the iii. Completeness – all assets, liabilities and equity clues on the potential misstatements that might occur on interests that should have been recorded have financial statements. Likewise, these assertions are usually been recorded and all related disclosures that used to assess external financial reporting risks. should have been included in the financial
Management assertions are claims made by members of statements have been included. management regarding certain aspects of a business. The iv. Accuracy, valuation and allocation – assets, concept is primarily used in regard to the audit of a liabilities and equity interests have been included company’s financial statements, where the auditors rely in the financial statements at appropriate amounts upon a variety of assertions regarding the business. The and any resulting valuation or allocation auditors test the validity of these assertions by conducting adjustments have been appropriately recorded a number of audit tests. and related disclosures have been appropriately measured and described. Management Assertions v. Classification – assets, liabilities and equity
Management’s assertions, audit assertions, or financial interests have been recorded in the proper statement assertions, are the claims made by the accounts. management of the company on financial statements. The vi. Presentation – assets, liabilities and equity moment the financial statements are produced, the interests are appropriately aggregated or assertions or the claims of management also exist, e.g., all disaggregated and clearly described, and related items in the income statement are assured to be complete disclosures are relevant and understandable in the and accurate, etc. context of the requirements of the applicable financial reporting framework. The management assertions listed in ISA 315 are as follows: Audit Objectives
1. Management Assertions About Transactions and The most efficient way to conduct audits is to obtain some Events and Related Disclosures combination of assurance for each class of transactions and for the ending balances in the related accounts. Audit Six management assertions are related to classes of objectives for each class of transactions include transactions and events and related disclosures, for the period under audit. 1. Transaction-Related Audit Objectives: Transaction- related audit objectives are classified into two groups: i. Occurrence—transactions and events that have general and specific. been recorded have occurred and pertain to the entity. General Transaction-Related Audit Objectives-Six general ii. Completeness—all transactions and events that transaction-related audit objectives are as follows.
should have been recorded have been recorded. i. Occurrence—Recorded transactions exist.
ii. Completeness—Existing transactions are be applied at different stages of the audit together or alone. recorded. Audit tests consist of risk assessment procedures, tests of iii. Accuracy—Recorded transactions are stated at controls, substantive tests of transactions, substantive the correct amounts. analytical procedures, and tests of details of balances. iv. Posting and Summarization—Recorded Independent auditors should examine whether the transactions are properly included in the master management’s claims made through the financial files and are correctly summarized. statements are correct. For this purpose, the independent v. Classification—Transactions included in the auditor should collect sufficient and appropriate evidence client’s journals are properly classified. by performing audit procedures. The independent auditor vi. Timing—Transactions are recorded on the should set an audit objective based on the claims made by correct dates. the business management. The type of audit process or the Specific Transaction-Related Audit Objectives—The type of evidence that the auditor will perform varies specific transaction related objectives are tailored to the depending on the purpose of the audit. The auditors should specific class of transactions being audited. For each identify the risks that may arise regarding the claims made management assertion, there are general transaction by the business management while establishing the related audit objectives as well as specific transaction- purpose of the audit. Then, the auditor should set up an related audit objectives. audit objective to examine whether these risks occur and, accordingly, design the audit procedures. 2. Balance-Related Audit Objectives: Balance-related audit objectives are classified into two groups: In the fulfilment of the audit objectives, auditors perform general and specific. various audit procedures. It is planned what kind of evidence should be collected, in what scope and in what General Balance-Related Audit Objectives-Eight general way in order to meet the audit objectives. For this purpose, balance-related audit objectives are as follows. a four-phase audit process is followed. i. Existence—Amounts included exist. Phase 1: Plan and design an audit approach based on risk ii. Completeness—Existing amounts are included. assessment procedures: In the first phase, an audit iii. Accuracy—Amounts included are stated at the approach is designed to collect sufficient and reliable correct amounts. evidence at the lowest cost. In order to estimate the risks iv. Classification—Amounts included in the client’s of misstatement in the financial statements and to interpret listing are properly classified. the information obtained during the audit, information is v. Cut-off—Transactions near the balance sheet obtained about the client’s business and its line of date are recorded in the proper period. business. In addition, the internal control system of the vi. Detail Tie-In—Details in the account balance business is examined and information about the internal agree with related master file amounts, foot to the control system is collected. total in the account balance, and agree with the total. Phase 2: Perform tests of controls and substantive tests of vii. Realizable Value—Assets are included at the transactions: In the second phase, the auditor performs amounts estimated to be realized. tests of controls to determine the effectiveness of the viii. Rights and Obligations—Assets are owned or internal control system. In addition to the tests of controls, controlled by the entity, and liabilities are substantive tests of transactions are applied to examine for obligations of the entity. monetary misstatements to determine whether the transaction related audit objectives have been satisfied for Specific Balance-Related Audit Objectives—The same as each class of transactions. for transaction related audit objectives, each balance- related audit objective should be tailored to the account Phase 3: Perform analytical procedures and tests of details balance being audited. of balances: In the third phase, the auditor will try to establish confidence in the accuracy of the amounts shown Audit Tests in the financial statements by applying analytical
The purpose of audit tests, or audit procedures, is to allow procedures and tests of details of balances. the auditor to collect sufficient appropriate audit evidence to be able to conclude with reasonable assurance that the Phase 4: Complete the audit and issue an audit report: In financial statements (FS) are free of material the fourth and final phase, the auditor will reach an misstatement. If sufficient appropriate audit evidence opinion on the compliance of the financial statements with cannot be obtained, or the evidence points to a material the financial reporting standards and present his/her own misstatement in the FS, the auditor will have to issue a opinion in writing in the audit report.
modified audit opinion. During the creation of the overall audit plan, the first stage
Audit tests show the ways and methods to be followed to of the audit process, and the preparation of the audit obtain audit evidence during the audit task. These tests can program, auditors use the following five types of audit
tests to determine whether the financial statements are • The extent of evidence obtained in gaining the prepared fairly: understanding of internal control
• The planned reduction in control risk • Risk assessment procedures • Tests of controls Substantive Tests of Transactions • Substantive tests of transactions It is used to determine whether all six transaction-related • Substantive analytical procedures audit objectives have been satisfied for each class of • Tests of details of balances transactions.
Risk Assessment Procedures When designing Tests of Controls and Substantive Tests At the risk assessment stage, the auditor tries to anticipate of Transactions, auditors emphasize satisfying the the risk of not accepting audit risk and fraudulent transaction-related audit objectives.
transactions based on their knowledge and experience Auditors follow a four-step approach to reduce assessed about the client’s business to which they will conduct the control risk audit. • Apply the transaction-related audit objectives to When performing an audit, you use risk assessment the class of transactions being tested, such as procedures to assess the risk that material misstatement sales. exists. This step is very important because the whole point • Identify key controls that should reduce control of a financial statement audit is finding out if the financial risk for each transaction-related audit objective. statements are materially correct. • Develop appropriate tests of controls for all The audit risk model is a model that divides the risks that internal controls that are used to reduce the have to be managed in an audit into three basic parts. The preliminary assessment of control risk below three basic components of an audit risk model are maximum (key controls). • For potential types of misstatements related to • Control Risk each transaction-related audit objective, design • Detection Risk appropriate substantive tests of transactions, • Inherent Risk considering deficiencies in internal control and
Misstatements will find their way into published financial expected results of the tests of controls in step 3.
statements only if three events all happen Substantive Analytical Procedures
• An error is made in the first place. The risk of The primary emphasis of tests of balances is on the that happening is known as ‘inherent risk’, and balance sheet. The key decisions involved in designing assessing that is a very big part of audit planning. tests of details of balances • The client’s internal control system does not • identify significant risks and assess risk of prevent, identify or correct the error. This is material misstatement known as ‘control risk’. • set performance materiality• assess control risk • The auditor does not detect the error during the for the sales and collection cycle audit. This is known as ‘detection risk’. • design and perform tests of controls and Tests of Controls substantive tests of transactions
The auditor will want to have information about the • design and perform substantive analytical internal control system of the business in which the procedures• design tests of details of accounts to auditor will conduct the audit. The work that the auditor satisfy balance-related audit objectives will do in order to recognize the internal control system is Types of tests in order of increasing cost: called tests of controls. • Substantive analytical procedures• Risk To obtain sufficient appropriate evidence to support a assessment procedures reduced assessment of control risk, the auditor • Tests of controls • Make inquiries of appropriate client business’ • Substantive tests of transactions personnel • Tests of details of balances Selecting the type of • Examine documents, records, and reports tests to perform depends on what audit objectives • Observe implementation of control-related are involved and must be balanced with the activities relevance vs. the cost of the testing. • Reperform implementation of control procedures by the auditor.
The amount of evidence needed for tests of controls depends on two things: