Audit Assertions & Procedures

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 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 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.

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 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 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.

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.

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.

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.

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.

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.