Question

NUMBER 3 (10 pts.)

Most of an auditor’s work in forming an opinion on financial statements consists of

obtaining and evaluating evidential matter concerning the financial statement

assertions.

Required:

a. What is the definition of “financial statement assertion?” Do not list the assertions.

b. What is the relationship between audit objectives and financial statement

assertions?

c. What should an auditor consider in developing the audit objectives of a

particular engagement?

Answer 1

What is the definition of “financial statement assertion?

Financial statement assertions are claims made by an organization's management regarding its financial statements. The assertions form a theoretical basis from which external auditors develop a set of audit procedures.

These are the explicit or implicit assertions made by a company regarding the fundamental accuracy of information contained in its financial statements. Financial statement assertions can be viewed as a company's official statement that the figures in its financial statements, such as the balance sheet and income statement, are a truthful presentation of its assets and liabilities in accordance with the applicable standards for recognition and measurement of such figures.

What is the relationship between audit objectives and financial statement assertions?

When a company's financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions.

If audit procedures result in a conclusion that any of the assertions are not correct, then the auditors may need to conduct additional audit procedures, or they may not be able to provide a clean audit opinion at all.

If management is committing fraud in generating financial statements, it is possible that the assertions will prove to be false.

What should an auditor consider in developing the audit objectives of a particular engagement?

Designing and performing audit procedures for obtaining audit evidence:

The results of the initial risk assessment procedures, like the entity’s business risk assessment or the assessment of internal controls, are the basis on which to design the nature, timing and extent of further audit procedures to be performed in respect of the risks identified.

Further audit procedures should respond to the assessed risks of material misstatement at the assertion level, so that sufficient appropriate evidence can be obtained in respect of those risks.

The detailed audit plan records the risk assessment procedures and the further audit procedures at the assertion level in response to the assessed risks. The audit plan describes the nature, extent and timing of the audit procedures to be performed by team members in respect of specific classes of transactions, account balances and disclosures. In the case of an audit of a small entity, the audit plan would normally be included in standard audit programs and schedules used for the various transactions and account balances. In any case, the standard programs need to be tailored so that the approach to an item, in terms of the use of substantive procedures, tests of controls or both, is proportional to the risk assessed for that item and is directed at obtaining audit evidence capable of verifying the underlying assertions.

The audit evidence generated by the planned audit procedures should be sufficient and appropriate to support and corroborate, or to contradict, the management’s assertions in respect of specific classes of transactions, account balances or disclosures in the financial statements.