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In general, the objective of an audit is to assess the risk of material misstatements in the financial statements. Material misstatements can arise from inadequacies in internal controls and from inaccurate management assertions. Thus, testing the validity of the various implicit managerial assertions is a key objective of an auditor.
Existence and Completeness
Auditing standards require that auditors test basic underlying management assertions implicit in the financial statements. Key among these various assertions are existence or occurrence, which describe a singular concept: Journal entries are not fiction. As the name implies, an auditor will conduct various procedures to verify that assets do in fact exist and that recorded transactions did in fact occur. Additionally, an auditor will seek evidence of completeness, so that the financial statements include all material transactions that occurred, and so the records do not omit material transactions for any reason.
Rights and Obligations
The various rights and obligations of the company are important management assertions inherent in the financial statements. Thus, an auditor will obtain evidence regarding a company's rights, such as proper title to assets and status of intellectual property. An auditor will be concerned with assertions relating to the company's obligations, such as accounts payable balances, long-term debts and tax liabilities. Thus, the audit objectives will be fulfilled upon validating these specific assertions.
Valuation or Allocation
Valuation or allocation are managerial assertions which are often material to the financial statements; thus, an auditor will diligently conduct audit procedures relating to these objectives. Generally accepted accounting principles, or GAAP, require that certain balance sheet items be presented using different valuation methodologies. Meeting these standards is a key audit objective, as the risk of material misstatement is low in probability, but high in magnitude. Thus, among other things, the historical cost of assets is verified, depreciation methods are scrutinized and the fair value of investments are calculated to satisfy this objective.
Presentation and Disclosure
Another specific audit objective is validating the presentation of the financial statements and the adequacy of the disclosures therein. Financial statements should conform to certain requirements and expectations, and should include the balance sheet, income statement, statement of cash flows and the statement of owner's equity. Relating to disclosure, the auditor will consider the sufficiency and clarity of footnotes and the transparency in management discussion and analysis, so he can assess the risk of material misstatement and fulfill the audit objective.
Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.