Audit Assertions & Procedures

by Marquis Codjia; Updated September 26, 2017
Audit

Audit assertions and procedures allow an auditor to carry out testing activities on a business organization's internal controls, policies or guidelines and financial reporting processes. Assertions relate to financial statement tests, and include presentation and disclosure, existence or occurrence, rights and obligations, completeness and valuation or allocation. Audit procedures indicate steps in testing internal controls and financial account balances.

Presentation and Disclosure

Presentation ensures that a business entity's financial statements are reported in accordance with generally accepted accounting principles and industry standards. Accurate presentation means that accounts are reported in specific ways in financial statements--for example, short- and long-term. Disclosures provide supplemental information to a reader of financial reports.

Existence or Occurrence

Existence tests check whether an asset or a liability can be verified physically. For example, an auditor might verify the existence of stock inventories at warehouses. Occurrence tests could inform an auditor about the date and place a business transaction happened.

Rights and Obligations

An auditor tests whether a business entity has rights to its assets -- what it owns --or has legal obligations for its liabilities -- what it owes. For example, an auditor might verify a bond agreement to confirm Company ABC's debt.

Completeness

Completeness in financial reporting means that a business entity's financial statements include four reports: a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of stockholders' equity.

Valuation or Allocation

Valuation tests check whether a corporation appraises its assets or liabilities properly. For instance, an auditor might ask how Company XYZ values its real-estate assets. Allocation techniques could relate to how a business entity allocates costs to products, segments or time periods.

Operating Environment Knowledge

An auditor understands an organization's operating environment by reading corporate policies and guidelines, departmental procedures and segment-level standards. An auditor also could acquire such knowledge by reading industry publications, inquiring from external auditors and reading prior years' reports.

Control Knowledge

An auditor acquires knowledge about controls existing in a process, or in an area under review, by discussing with a variety of experts--such as accountants, risk managers, tax specialists and traders. For example, an auditor might ask a risk manager to explain the process for calculating a bond option's price.

Control Testing

An audit specialist applies generally accepted auditing standards to ensure that internal controls, processes and procedures are "adequate" and "effective." Adequate controls explain in detail steps involved in task performance and decision-making processes. Effective controls remedy deficiencies properly.

Tests of Account Balances

An auditor test account balances when a business entity's control environment is not adequate or effective. For example, an audit specialist reviewing Insurance and Co.'s premiums receivable balances might assess whether premium amounts are computed properly.

Tests of Account Details

An auditor conducts detailed tests of accounts and account groups to ensure that individual account balances agree with financial statement balances. For example, an auditor might review individual policyholders' accounts to verify that the sum of these accounts agree with amounts reported on an insurance company's balance sheet.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.

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