Management assertions

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Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements (management) is making to its users. These assertions are relevant to auditors performing a financial statement audit in two ways. First, the objective of a financial statement audit is to obtain sufficient appropriate audit evidence to conclude on whether the financial statements present fairly, in all material respects, the financial position of a company and the results of its operations and cash flows. [1] In developing that conclusion, the auditor evaluates whether audit evidence corroborates or contradicts financial statement assertions. [2] Second, auditors are required to consider the risk of material misstatement through understanding the entity and its environment, including the entity's internal control. [3] [4] Financial statement assertions provide a framework to assess the risk of material misstatement in each significant account balance or class of transactions. [5]

Both United States and International auditing standards include guidance related to financial statement assertions, although the specific assertions differ. The PCAOB and the IFAC address this topic in AS 1105 [6] (updated from AS 15 [7] as of December 31, 2016) and ISA 315, respectively. [4] The American Institute of Certified Public Accountants identifies the following financial statement assertions: [8]

  1. Transactions and events
    • Occurrence — the transactions recorded have actually taken place.
    • Completeness — all transactions that should have been recorded have been recorded.
    • Accuracy — the transactions were recorded at the appropriate amounts.
    • Cutoff — the transactions have been recorded in the correct accounting period.
    • Classification — the transactions have been recorded in the appropriate caption.
  2. Accounts balances as of period end
    • Existence — assets, liabilities and equity balances exist.
    • Rights and Obligations — the entity legally controls rights to its assets and its liabilities faithfully represent its obligations.
    • Completeness — all balances that should have been recorded have been recorded.
    • Valuation and Allocation — balances that are included in the financial statements are appropriately valued and allocation adjustments are appropriately recorded.
  3. Presentation and disclosure
    • Occurrence — the transactions and disclosures have actually occurred.
    • Rights and Obligations — the transactions and disclosures pertain to the entity.
    • Completeness — all disclosures have been included in the financial statements.
    • Classification — financial statements are clear and appropriately presented.
    • Accuracy and Valuation — information is disclosed at the appropriate amounts.

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American Institute of Certified Public Accountants

The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, with more than 418,000 members in 143 countries in business and industry, public practice, government, education, student affiliates and international associates. Founded in 1887, the organization sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments. It also develops and grades the Uniform CPA Examination. The AICPA maintains offices in New York City; Washington, DC; Durham, NC; and Ewing, NJ.

Audit Systematic and independent examination of books, accounts, documents and vouchers of an organization

An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditors consider the propositions before them, obtain evidence, and evaluate the propositions in their auditing report.

Financial audit

A financial audit is conducted to provide an opinion whether "financial statements" are stated in accordance with specified criteria. Normally, the criteria are international accounting standards, although auditors may conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organisation. In providing an opinion whether financial statements are fairly stated in accordance with accounting standards, the auditor gathers evidence to determine whether the statements contain material errors or other misstatements.

An audit committee is a committee of an organisation's board of directors which is responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external.

Auditors report

The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit.

Statement on Auditing Standards No. 99: Consideration of Fraud in a Financial Statement Audit, commonly abbreviated as SAS 99, is an auditing statement issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) in October 2002. The original exposure draft was distributed in February 2002.

External auditor

An external auditor performs an audit, in accordance with specific laws or rules, of the financial statements of a company, government entity, other legal entity, or organization, and is independent of the entity being audited. Users of these entities' financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent audit report.

Generally Accepted Auditing Standards

Generally Accepted Auditing Standards, or GAAS are sets of standards against which the quality of audits are performed and may be judged. Several organizations have developed such sets of principles, which vary by territory. In the United States, the standards are promulgated by the Auditing Standards Board, a division of the American Institute of Certified Public Accountants (AICPA).

A going concern is a business that is assumed will meet its financial obligations when they fall due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period. The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.

Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP).

ISA 500 Audit Evidence is one of the International Standards on Auditing. It serves to guide the auditor on obtaining audit evidence through the application of an appropriate mix of tests of control systems and substantive tests of transaction and balances.

Audit evidence is evidence obtained by auditors during a financial audit and recorded in the audit working papers.

Internal control, as defined by accounting and auditing, is a process for assuring of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization.

SOX 404 top–down risk assessment

In financial auditing of public companies in the United States, SOX 404 top–down risk assessment (TDRA) is a financial risk assessment performed to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Under SOX 404, management must test its internal controls; a TDRA is used to determine the scope of such testing. It is also used by the external auditor to issue a formal opinion on the company's internal controls. However, as a result of the passage of Auditing Standard No. 5, which the SEC has since approved, external auditors are no longer required to provide an opinion on management's assessment of its own internal controls.

In the United States, the Auditing Standards Board (ASB) is the senior technical committee designated by the American Institute of Certified Public Accountants (AICPA) to issue auditing, attestation, and quality control statements, standards and guidance to certified public accountants (CPAs) for non-public company audits. Created in October 1978, it is composed of 19 members representing various industries and sectors, including public accountants and private, educational, and governmental entities. It issues pronouncements in the form of statements, interpretations, and guidelines, which all CPAs must adhere to when performing audits and attestations.

Entity-level controls

Entity-level controls are internal controls that help to ensure that management directives pertaining to the entire entity are carried out. They are the second level of a top-down approach to understanding the risks of an organization. Generally, entity refers to the entire company.

Regulation S-X is a prescribed regulation in the United States of America that lays out the specific form and content of financial reports, specifically the financial statements of public companies. It is cited as 17 C.F.R. Part 210; the name of the part is "Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975".

Statement on Standards for Attestation Engagements no. 18 is a Generally Accepted Auditing Standard produced and published by the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board. Though it states that it could be applied to almost any subject matter, its focus is reporting on the quality of financial reporting. It pays particular attention to internal control, extending into the controls over information systems involved in financial reporting. It is intended for use by Certified Public Accountants performing attestation engagements, the preparation of a written opinion about a subject, and the client organizations preparing the reports that are the subject of the attestation engagement. It prescribes three levels of service: examination, review, and agreed-upon procedures. It also prescribes two types of reports for reporting on an examination of controls at a service organization relevant to user entities' internal control over financial reporting: Type 1, which includes an assessment of internal control design, and Type 2, which additionally includes an assessment of the operating effectiveness of controls. Published April 2016, SSAE 18 and all previous standards it supersedes are represented in section AT-C of the AICPA Professional Standards, with most sections becoming effective on May 1, 2017.

References

  1. ↑ "Auditing Standard No. 3101.08". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
  2. ↑ "Auditing Standard No. 1105.02". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
  3. ↑ "AU Section 315" (PDF). aicpa.org/. American Institute of Certified Public Accountants. Retrieved 15 July 2019.
  4. 1 2 "International Standards on Auditing sec. 315" (PDF). ifac.org/. International Federation of Accountants. Retrieved 15 July 2019.
  5. ↑ "Auditing Standard No. 1105.12". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
  6. ↑ "Auditing Standard No. 1105.11". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
  7. ↑ "Auditing Standard No. 15 (superseded)". pcaobus.org/. Public Company Accounting Oversight Board. Retrieved 15 July 2019.
  8. ↑ "AU Section 326" (PDF). aicpa.org. American Institute of Certified Public Accountants. Retrieved 25 September 2014.
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