Financial Statement Assertions
Financial statement assertions are claims made by the management of a company regarding the recognition, measurement, presentation, and disclosure of financial information in the financial statements. These assertions are embedded in the company’s financial statements, either explicitly or implicitly. They are the representations of management that are expressed in the financial statements.
The assertions are typically categorized into five categories:
- Existence or Occurrence: These assertions confirm that assets and liabilities of the company exist at a specific date and recorded transactions have occurred during a specific period.
- Rights and Obligations: These assertions confirm that the company holds or controls the rights to its reported assets at a given date, and the liabilities are obligations of the company at a given date.
- Completeness: These assertions confirm that all transactions and events have been recorded in the financial statements.
- Valuation or Allocation: These assertions confirm that assets, liabilities, and recorded transactions have been valued in accordance with applicable accounting standards and policies.
- Presentation and Disclosure: These assertions confirm that the components of the financial statements are properly classified, described, and disclosed in accordance with relevant accounting standards.
These assertions provide a structure for auditors to understand the areas in which a company’s financial statements may be materially misstated. When performing an audit, auditors will typically design testing procedures to confirm these assertions.
Example of Financial Statement Assertions
Here are examples of each of the five types of assertions using a fictional company “Foodie Inc.” which operates a chain of restaurants:
- Existence or Occurrence: Foodie Inc. reports inventory of $500,000 on their balance sheet. The existence assertion means that this inventory truly exists and is not fictitious. An auditor may verify this by physically inspecting the inventory.
- Rights and Obligations: Foodie Inc. reports a building worth $2 million on its balance sheet. The rights and obligations assertion indicates that Foodie Inc. owns the rights to this building, and it’s not leased or owned by another entity. An auditor might confirm this by checking property ownership documents.
- Completeness: Foodie Inc. records all sales transactions in its income statement. The completeness assertion ensures that all transactions that should have been recorded have been recorded. An auditor might cross-verify sales entries with receipts, bank statements, or sales contracts to ensure completeness.
- Valuation or Allocation: Foodie Inc. reports accounts receivable of $100,000 on their balance sheet. The valuation assertion suggests that this figure is a fair representation of the actual amount expected to be received. Auditors may confirm this by checking the basis on which these receivables were valued and checking the creditworthiness of the debtors.
- Presentation and Disclosure: Foodie Inc. provides notes to its financial statements detailing its accounting policies, significant estimates, and contractual obligations. The presentation and disclosure assertion ensures that the financial statements and notes are properly presented and all relevant information is disclosed in accordance with applicable accounting standards. An auditor may verify this by reviewing the notes and disclosures and checking for compliance with accounting standards.
Through these assertions, the management of Foodie Inc. provides an assurance that the financial statements give a true and fair view of the company’s financial performance and position.
