presentation and disclosure assertion accounts receivable

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• Financial Statement Assertions
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Accuracy and Valuation

Completeness, rights and obligations, presentation and disclosure.

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

What Are Financial Statement Assertions?

J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

Financial statement assertions are statements or claims that companies make about the fundamental accuracy of the information in their financial statements . These statements include the balance sheet, income statement, and cash flow statement. Also referred to as management assertions, these claims can be either implicit or explicit.

So why do corporate financial statement assertions matter? They are the official statement that the figures reported are a truthful presentation of the company's assets and liabilities following the applicable standards for recognition and measurement of such figures. In this article, we go through each assertion and what they mean.

Key Takeaways:

• Financial statement assertions are a company's official statement that the figures the company is reporting are accurate.
• Assertions are made to attest to the authenticity of information on balance sheets, income statements, and cash flow statements.
• Investors and analysts rely on accurate statements to evaluate a company's stock.
• The Financial Accounting Standards Board requires publicly traded companies to prepare financial statements following the GAAP.
• Companies must attest to assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure.

Understanding Financial Statement Assertions

As noted above, a company's financial statement assertions are a company's stamp of approval—that the information in its financial statements is a true representation of its financial position. This includes any information on the balance sheet, income statement, and cash flow statement, and pertains to each and every asset and liability that appears on these forms.

Investors should keep an eye on these assertions. That's because nearly every financial metric used to evaluate a company's stock is computed using figures from these financial statements. If the figures are inaccurate, the financial metrics such as the price-to-book ratio (P/B) or earnings per share (EPS), which both analysts and investors commonly use to evaluate stocks, would be misleading.

The Financial Accounting Standards Board (FASB) establishes accounting standards in the United States. These are regulations that companies must follow when preparing their financial statements. The FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP).

There are five different financial statement assertions attested to by a company's statement preparer. These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. More details on each of these assertions are listed below.

The assertion of accuracy and valuation is the statement that all figures presented in a financial statement are accurate and based on the proper valuation of assets, liabilities, and equity balances.

This financial assertion states that the different components of a financial statement, such as assets, liabilities, revenues, and expenses, have all been properly classified within the statement. One of the ways to test this assertion is to redo all the calculations.

For instance, the assertion of accurate valuation regarding inventory states that inventory is valued in accordance with the International Accounting Standards Board's (IASB) IAS 2 guidelines, which requires inventory to be valued at the lower figure of either cost or net realizable value.

The assertion of existence is the assertion that the assets, liabilities, and shareholder equity balances appearing on a company's financial statements exist as stated at the end of the accounting period that the financial statement covers. Put simply, this assertion assures that the information presented actually exists and is free from any fraudulent activity.

You can test the authenticity of the existence of the assertions by physically verifying all noncurrent assets and receivables.

For example, any statement of inventory included in the financial statement carries the implicit assertion that such inventory exists, as stated, at the end of the accounting period. The assertion of existence applies to all assets or liabilities included in a financial statement.

This assertion attests to the fact that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company's entire inventory (even inventory that may be temporarily in the possession of a third party) is included in the total inventory figure appearing on a financial statement.

The completeness included in a financial statement means that all transactions included in the statement occurred during the accounting period that the statement covers and that all transactions that occurred during the stated accounting period are included in the statement.

There are tests that you can conduct to ensure completeness. Some of these include reviewing accounts and reconciliation of payables to supplier statements.

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

The assertion of rights and obligations is a basic assertion that all assets and liabilities included in a financial statement belong to the company issuing the statement. Put simply, the company confirms that it has legal authority and control of all the rights (to assets) and obligations (to liabilities) highlighted in the financial statements.

The rights and obligations assertion states that the company owns and has the ownership rights or usage rights to all recognized assets. For liabilities, it is an assertion that all liabilities listed on a financial statement belong to the company and not to a third party.

If you want to test out the authenticity of this assertion, you can review legal documents, such as deeds , and borrowing agreements for loans and other debts.

The final financial statement assertion is presentation and disclosure . This is the assertion that all appropriate information and disclosures are included in a company's statements and all the information presented in the statements is fair and easy to understand. This assertion may also be categorized as an understandability assertion.

Many professionals review and test the authenticity of this assertion by using certain checklists. This helps ensure that the financial statements in question comply with accounting standards and regulations.

Financial statement assertions are claims made by companies that attest that the information on their financial statements is true and accurate. Information related to the assertions is found on corporate balance sheets, income statements, and cash flow statements. There are five assertions, including accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.

What Are Accounting Management Assertions?

Accounting management assertions are implicit or explicit claims made by financial statement preparers. These assertions attest that the preparers abided by the necessary regulations and accounting standards when preparing the financial statements.

Are Financial Accounting Assertions Important in Auditing?

Financial accounting assertions are a very important part of auditing. That's because there is no other way to hold the preparers of financial statements accountable. By signing and attesting to the authenticity of the statements. the preparer essentially puts their stamp of approval on the paperwork.

What Are the Accounting Assertions?

There are generally five accounting assertions that the preparers of financial statements make. They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.

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Audit Accounts Receivable

Accounts receivable are usually material items on the balance sheet; hence to audit accounts receivable, it is very important to perform proper audit procedures in order to obtain sufficient audit evidence for making appropriate conclusion on receivables.

In the audit of accounts receivable, the inherent risk of accounts receivable involves more on the existence of their balances. This is due to the client’s accounts receivable usually expose to the risk that is related to the intentional manipulation of sales in order to reach the target sales or an actual fraud to steal the products.

An example of accounts receivable manipulation would be the client’s personnel may persuade or collude with the customers to buy the products on credit and promise to have them return products to the company after year-end to increase sales at year-end in order to achieve the target sales. In this case, the accounts receivable balance here should not exist in the first place as the customers will return the goods after the year-end.

As auditors, we usually perform audit procedures on accounts receivable by testing the audit assertions such as existence, valuation, completeness, and right and obligation. Also, accounts receivable are usually tested together with the sale revenue transactions in the client’s account.

Audit Assertions for Accounts Receivable

In the audit of accounts receivable, we usually test the audit assertions included in the table below:

Audit Procedures for Accounts Receivable

Existence assertion tests whether the accounts receivable on the balance sheet actually exist. Similar to other asset items, the existence is usually the major auditing issue for us when we perform the audit of accounts receivable.

This is due to receivable is likely to be a material area and its inherent risk is usually related to fraud and sales revenue manipulation. In order to test existence on accounts receivable, the confirmation is usually made by sending the letter to the client’s customers asking them to confirm whether they really owe such amount to the client.

As the process of confirmation procedures, from preparation confirmation letter until receiving back the confirmation letter, usually takes some time especially after the letter was sent out, we usually perform the accounts receivable confirmation at the early of the audit fieldwork.

In the audit of accounts receivable, we can achieve two objectives in performing the receivable confirmation. First, we can verify the existence of the customer’s balances; second, we can ensure the correctness of those balances.

There are two types of confirmation, positive confirmation and negative confirmation, as included in the table below:

Valuation assertion tests whether the accounts receivable recorded in the client’s accounts reflect their actual economic value. Though the receivable confirmation in the audit of accounts receivable mentioned above can ensure the existence and the accuracy of customers’ balances, it cannot provide evidence on the correctness of accounts receivable valuation.

For example, the client’s customers may confirm on the letter that they really owe such amount to the client. However, they may not have sufficient resources to pay the debt that they owe at all.

We usually test valuation by performing both substantive analytical procedures and tests of details. In substantive analytical procedures, we usually compare figures and ratios with the previous year and industry average.

Example: test of valuation in the audit of accounts receivable

• Compare the irrecoverable debt expense as percentage of sales with the previous year and the industry average
• Compare the allowance for irrecoverable debts as percentage of accounts receivable with the previous year and the industry average
• Compare accounts receivable turnover and receivables days with the previous year and the industry average
• Obtain and agree the detailed aged receivables listing to trial balance
• Select a sample of old debts on detailed aged accounts receivable to discuss the recoverability with management and further review on customers’ responses
• Review and discuss with management on allowance for doubtful accounts
• Determine the reasonableness of allowance for doubtful accounts
• Examine credit notes issued after year-end that should be made against current period balances  

Completeness

Completeness assertion tests whether all accounts receivable have been recorded. Lack of completeness usually results in the understatement of the accounts and balance; in this case, as we audit accounts receivable, the lack of completeness means the understatement of accounts receivable balances.

Example: test of completeness in the audit of accounts receivables

• Select a sample of shipping documents such as bill and lading and trace back to sale invoices and then to sales and accounts receivable ledger account.
• Agree individual balance on detailed aged receivables listing to the sales ledger account
• Agree total balance of detailed aged receivables listing to the sales ledger account

Right and obligation

Right and obligation assertion tests whether the client has the right of control on all accounts receivable show on its financial statement. The concern in the audit of accounts receivable is usually on the factoring of the receivables in which the client should no longer have the right of control to receivables.

This is because the control should have been transferred when the company sold or factored its receivable. Hence, the factored receivables should be removed from the balance sheet.

We usually test the right and obligation assertion on accounts receivable by making inquiries of management on factoring matter, reviewing the loan agreement and reviewing board minutes for any evidence that receivables have been sold or factored.

All in all, accounts receivable’ existence and valuation are the primary concerns for us as auditors. The existence of accounts receivable itself is the high-risk area as the misstatement in this area could be due to fraud or manipulation of sales.

On the other hand, misstatement occurred in the area of valuation usually tends to be an overstatement of net receivables as the client might forget to make sufficient allowance for receivables or they are perhaps not willing to make sufficient allowance as the bigger allowance means the bigger expense, hence the lower profit.

Related posts:

• Risk of Material Misstatement for Accounts Receivable
• Write Off Accounts Receivable
• Accounts Receivable
• Audit Accounts Payable
• Audit Investments

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• The audit of assertions
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• Audit and Assurance (AA)
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Relevant to Foundations in Audit (FAU) and Audit and Assurance (AA)

This article will focus on assertions as identified by ISA 315 (Revised 2019) and also provides useful guidance to candidates on how to tackle questions dealing with these.

Interim and final audit procedures

During the interim audit, the system of internal control is documented and evaluated. This will determine the mix of tests of control and substantive procedures but both will tend to focus on transactions that have occurred so far in the period.

During the final audit, the focus is on the financial statements and the assertions about assets, liabilities and equity interests. At this stage the auditor will design substantive procedures to ensure that assurance has been gained over all relevant assertions.

Transactions include sales, purchases, and wages paid during the accounting period. Account balances include all the asset, liabilities and equity interests included in the statement of financial position at the period end.

Obviously there is a link between the two because if the auditor performs tests to confirm the occurrence of sales this will also provide some assurance about the existence of receivables, although the auditor may perform other tests specifically focussed on existence.

The assertions listed in ISA 315 (Revised 2019) are as follows:

Assertions about classes of transactions and events and related disclosures   for the period under audit (i)  Occurrence – the transactions and events that have been recorded or disclosed have occurred, and such transactions and events   pertain to the entity. (ii)  Completeness – all transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included. (iii)  Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described. (iv)  Cut–off – transactions and events have been recorded in the correct accounting period. (v)  Classification – transactions and events have been recorded in the proper accounts. (vi)  Presentation – transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Assertions about account balances and related disclosures   at the period end (i)  Existence – assets, liabilities and equity interests exist. (ii)  Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. (iii)  Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included. (iv)  Accuracy, valuation and allocation – assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described. (v)  Classification – assets, liabilities and equity interests have been recorded in the proper accounts. (vi)  Presentation – assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Interpretation of assertions and appropriate audit procedures

In many cases, the meaning of the assertions is fairly obvious and in preparation for their FAU or AA exam candidates are reminded of the importance to learn and be able to apply the use of assertions in the course of the audit. Particularly, candidates need to be able to identify and explain the assertions, identify which assertion is being tested by a particular audit procedure and to describe audit procedures for relevant assertions in testing a specific transaction or balance, bearing in mind that the relevant disclosures should also be considered when deriving appropriate procedures.

Below is a summary of the assertions, a practical application of how the assertions are applied and some example audit procedures relevant to each.

Transaction assertions

Occurrence   – this means that the transactions recorded or disclosed actually happened and relate to the entity. For example, that a recorded sale represents goods which were ordered by valid customers and were despatched and invoiced in the period. An alternative way of putting this is that sales are genuine and are not overstated.

Relevant test  – select a sample of entries from the sales account in the general ledger and trace to the appropriate sales invoice and supporting goods dispatched notes and customer orders.

Completeness  –  this means that transactions that should have been recorded and disclosed have not been omitted.

Relevant test  – select a sample of customer orders and check to dispatch notes and sales invoices and the posting to the sales account in the general ledger.

Note the difference in the direction of the above test. In order to test completeness, the procedure should start from the underlying documents and check to the entries in the relevant ledger to ensure none have been missed. To test for occurrence the procedures will go the other way and start with the entry in the ledger and check back to the supporting documentation to ensure the transaction actually happened.

Accuracy   – this means that there have been no errors while preparing documents or in posting transactions to ledgers. The reference to disclosures being appropriately  measured and described  means that the figures and explanations are not misstated.

Relevant test  – reperformance of calculations on invoices, payroll, etc, and the review of control account reconciliations are designed to provide assurance about accuracy.

Cut–off  –  that transactions are recorded in the correct accounting period.

Relevant test  – recording last goods received notes and dispatch notes at the inventory count and tracing to purchase and sales invoices to ensure that goods received before the year end are recorded in purchases at the year end and that goods dispatched are recorded in sales.

Classification  –  that transactions are recorded in the appropriate accounts – for example, the purchase of raw materials has not been posted to repairs and maintenance.

Relevant test   – check purchase invoices postings to general ledger accounts.

Presentation  –  this means that the descriptions and disclosures of transactions are relevant and easy to understand. There is a reference to transactions being appropriately aggregated or disaggregated. Aggregation is the adding together of individual items. Disaggregation is the separation of an item, or an aggregated group of items, into component parts. The notes to the financial statements are often used to disaggregate totals shown in the statement of profit or loss. Materiality needs to be considered when judgements are made about the level of aggregation and disaggregation.

Relevant test  – confirm that the total employee benefits expense is analysed in the notes to the financial statements under separate headings– ie wages and salaries, pension costs, social security contributions and taxes, etc.

Account balance assertions

Existence  –  means that assets and liabilities really do exist and there has been no overstatement – for example, by the inclusion of fictitious receivables or inventory. This assertion is very closely related to the  occurrence  assertion for transactions.

Relevant tests – physical verification of non–current assets, circularisation of receivables, payables and the bank letter.

Rights and obligations  –  means that the entity has a legal title or controls the rights to an asset or has an obligation to repay a liability.

Relevant tests  – in the case of property, deeds of title can be reviewed. Current assets are often agreed to purchase invoices although these are primarily used to confirm cost. Long term liabilities such as loans can be agreed to the relevant loan agreement.

Completeness  –  that there are no omissions and assets and liabilities that should be recorded and disclosed have been. In other words there has been no understatement of assets or liabilities.

Relevant tests  – A review of the repairs and expenditure account can sometimes identify items that should have been capitalised and have been omitted from non–current assets. Reconciliation of payables ledger balances to suppliers’ statements is primarily designed to confirm completeness although it also gives assurance about existence.

Accuracy, valuation and allocation  –  means that amounts at which assets, liabilities and equity interests are valued, recorded and disclosed are all appropriate. The reference to allocation refers to matters such as the inclusion of appropriate overhead amounts into inventory valuation.

Relevant tests  – Vouching the cost of assets to purchase invoices and checking depreciation rates and calculations.

Classification  –  means that assets, liabilities and equity interests are recorded in the proper accounts.

Relevant tests  – the test for transactions of checking purchase invoice postings to the appropriate accounts in the general ledger will be relevant again. Also that research expenditure is only classified as development expenditure if it meets the criteria specified in IAS® 38 Intangible Assets.

Presentation  –  this means that the descriptions and disclosures of assets and liabilities are relevant and easy to understand. The points made above regarding aggregation and disaggregation of transactions also apply to assets, liabilities and equity interests.

Relevant tests  – auditors often use disclosure checklists to ensure that financial statement presentation complies with accounting standards and relevant legislation. These cover all items (transactions, assets, liabilities and equity interests) and would include for example confirming that disclosures relating to non–current assets include cost, additions, disposals, depreciation, etc.

Typical exam questions

Questions on assertions may often be included in the objective test questions (OTs) in the AA and FAU exams and may also appear in the constructed response questions where candidates may be required to demonstrate knowledge of the assertions and procedures that are linked to particular transaction or account balance assertions in more detail.

Below are some examples which provide an indication, but not an exhaustive list of how assertions can be tested at FAU and AA.

Which of the following substantive procedures provides evidence over the COMPLETENESS of non–current assets?

A.  Select a sample of assets included in the non–current asset register and physically verify them at the client premises B.  Review the repairs and maintenance expense account to identify any items of a capital nature C.  For assets disposed of, agree the sale proceeds to supporting documentation and cash book D.  For a sample of non-current assets, recalculate the depreciation charge

In order to tackle a question like this, candidates are encouraged to work through each procedure and think about the objective of the auditor when they are testing for completeness and to consider whether the procedure as presented would satisfy that objective:

A.  Confirms existence not completeness – the direction of the test is key here. Had the test been the other way selecting sample of non–current assets in the factory and tracing to the non–current asset register, that would have confirmed completeness. B.  Confirms completeness as the auditor may identify non–current assets that have not been capitalised and is therefore the correct answer. C.  Confirms the proceeds of sale so is more relevant to accuracy or valuation. D.  Confirms depreciation so is also more relevant to accuracy or valuation.

Candidates may be asked to identify and apply the assertions to a specified area of the financial statements in a constructed response question as follows:

Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the VALUATION of X Co’s inventory.

Candidates must be able to link relevant procedures to the specific assertion required. In this instance, for example procedures performed at the inventory count which provide evidence of existence and completeness of inventory would not be relevant.

Assertions have always been an important area of the syllabus for audit examinations.

Candidates should ensure that they know the assertions and can explain what they mean. Candidates should not simply memorise these tests but also ensure they understand the reasons why the test provides assurance about the particular assertion. In some instances, the direction of the test will be a key point to consider.

Written by a member of the Audit and Assurance examining team

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Audit Procedures for Accounts Receivable

Introduction.

In this article, we will cover the detailed audit procedures for accounts receivable. This includes the objectives, the key assertions as well as the audit procedures in response to those assertions. It is very essential to perform proper audit procedures for accounts receivable in order to obtain sufficient appropriate evidence . Accounts receivable are material items on the Balance Sheet and auditors should be more concerned about these items during the audit. Audits perform audit procedures on accounts receivable by testing the various audit assertions.

Objectives of Accounts Receivable Audit

The main objective of an accounts receivable audit is to determine whether there are adequate controls and procedures to ensure the proper recording of accounts receivable . The overall objective of the accounts receivable audit is to ensure they are presented fairly in the financial statements .

Why Do We Need to Audit the Accounts Receivable?

Commonly, we audit the accounts receivable because it is the big item in the Balance Sheet and there are many risks associated with those accounts receivable. Below are the main risks associated with the accounts receivable:

• An entity or management may intentionally account for or overstate the accounts receivable and revenue in order to look good. This is also called window dressing.
• There is a possibility of un-reported collection by staff that has to keep the accounts receivable in the book.
• The proper calculation of the allowance for the doubtful account might not be correct resulting in the understatement of provision or allowance recorded in the book.

In addition to the risk on the accounts receivable, the auditor wants also to test if there are any control deficiencies. The control deficiencies give rise to possible fraud as well as other problems that result in the misstatement of accounts receivable presented in the Balance Sheet.

The above problems both on risk and control deficiencies answer the reason why auditors shall need to audit the accounts receivable.

In the later section, we will cover the key assertions as well as the audit procedures for the audit of accounts receivable.   

Key Assertions of Accounts Receivable Audit

As mentioned above, the audit on accounts receivable is very important as it is the key and material item in the financial statements. In order to audit the accounts receivable, it requires to use the combination of analytical procedures and tests of detail or substantive tests. Typically, we perform the audit of accounts receivable in conjunction with the audit of sales. Thus, in this section, we will take some assertions that we usually test in combination with accounts receivable. Below are the key audit assertions for accounts receivable and we will group these assertions into 3 main types:

Key Audit Procedures for Accounts Receivable Audit

In the below section set out the key detail practical audit procedures for accounts receivable. All those procedures are in response to the assertions as mentioned in the above section.

Review Accounts Receivables Process

The first thing is the auditor should review a company’s accounts receivables process to investigate the original information. The auditor can test a sample of customers from the company’s receivables ledger as per the process to verify the original information. In this procedure, the auditor wants to ensure the existence and completeness of the accounts receivable.

Confirm Accounts Receivables

ISA 505 – External Confirmation covers the confirmation of accounts receivable .

Auditors need to confirm accounts receivables balance by directly contacting customers for unpaid receivables balance at the end of the period. This procedure is for large account balances but sometimes includes a few random customers. We commonly call it accounts receivable circularization.

In this procedure, the purpose is also to ensure the existence as well as the Rights and Obligations of accounts receivable that have been recorded in the accounting book.

If there is any discrepancy or there is no response from the account receivable confirmation , the auditor shall need to do a follow-up where necessary.

In addition, the auditor may also perform alternative procedures in case there is an exception as a result of the confirmation or in case it is impossible to get the confirmation. These alternative procedures that auditor can carry out are as follow:

• Review the subsequent receipt after the year-end by inspecting the bank statements and receipt vouchers relating to that account receivable.
• In case the account receivable is still outstanding at the date of the review, the auditor may perform the examination on the customers’ account and any other related correspondence in order to assess such outstanding amount is correct or not and pertain to the invoice being tested.
• The auditor may also perform the inquiry from management for the explanation of any invoices that remained unpaid while the subsequent invoices have been paid for.

We commonly divide the accounts receivable confirmation into two types; positive and negative confirmation.

Positive confirmation typically requires the confirming party to respond directly to the auditor whether they agree or disagree with the amount stated in the confirmation letter. If they disagree, they can write down the reason for such disagreement.

In contrast, negative confirmation typically requires the confirming party to respond to the auditor only when they disagree with the number provided in the confirmation letter.

In practice, we rarely use the negative confirmation as it is difficult to ensure that the confirming party has actually received such a confirmation letter. The letter may lose on the way and does not reach the confirming party. In this case, if there is any disagreement that the confirming party fails to respond to, then the auditor might treat it as correct.

Testing Invoices from Receivables Report

The auditor should select a sample of invoices from the accounts receivables aging report and test the supporting documents of those invoices. For the selected invoices, the auditor shall perform the review and compare to the authorized price list and other relevant trade documents or contract to ensure that the price charge on the invoice is correct.

The auditor may also test the discount by performing the recalculation to ensure the mathematical accuracy of such a discount.

In addition, the auditor shall also perform the recalculation of tax to ensure that the amount on the invoice is correct.

 All these procedures on those selected invoices are performed so that auditors are able to ensure the accuracy of the accounts receivable.

Verify Shipping Documents

The auditor should inspect the shipping documents to verify the sales period. The auditor will examine the invoices, match the invoice dates to the shipment dates to ensure sales are recorded in the correct accounting period. This is to ensure the cut-off of the accounts receivable has been properly recorded in the correct period.

In addition, the auditor shall trace the sample of shipping documents to the sales invoices as well as to the sales ledger and account receivable ledger in order to ensure the completeness of the accounts receivable.

Review Credit Memos and Cash Receipts

The auditor should review a sample of credit memos and cash receipt copies or vouchers to check whether they were properly authorized and issued in the correct period. For the credit memo, the auditor shall perform the recalculation to see if such credit notes have been properly applied for those selected samples.

This is to ensure both accuracy and cut-off of the receivables.

In addition, perform the review of the selected credit memo after the year-end and verify if the allowance has been provided against the current period’s balances. The auditor performs this procedure to ensure the proper valuation and allocation assertion .

Related Party Receivables

The auditors should collectively review a list of the company’s current related parties and associated transactions. They should identify how the related party transactions are identified and recorded in the company’s system. The auditor should analyze the presentation of related party transactions in the company’s financial statements.

In this procedures, auditor wants to ensure the proper presentation and disclosure of the related party transactions.

Trend Analysis

The auditor should perform a trend analysis of the aged analysis of accounts receivables account or sales account or perform a comparison of the two overtime to see whether there are any unusual trends. If there are any unusual trends, the auditor should make inquiries about the reasons for those unusual trends.

In this trend analysis, the auditor shall also perform the comparison of key ratios relating to account receivable to previous years or industry data. Those key ratios are the account receivable turnover and account receivable days. Sometimes, we call account receivable days as average daily sales outstanding or days sales outstanding (DSO).

This is part of the analytical procedures to gain an understanding of the trend so that author is able to spot any unusual fluctuation and perform any substantive audit procedures accordingly.

This analysis is part of the audit procedures to ensure the proper valuation and allocation of accounts receivable.

GAAP Considerations

The auditor should perform the review of whether an entity being audit has applied the appropriate accounting policies and procedures related to accounts receivable in accordance with GAAP. They should review the presentation, disclosure, and notes for accounts receivable balance and ensure proper accounting policies and procedures are applied.

Cut-off Analysis

The cut-off is the process to ensure accounts receivables are recorded in the right accounting period. Auditors should follow procedures, review, and confirm to ensure that the entity properly recorded the accounts receivables in the correct accounting period to which they belong.

Assessing the Allowance for Doubtful Accounts

The auditor should review the process that a company follows to make an allowance for doubtful accounts. The auditor will compare the method used this year with the method of last year to determine whether the method is appropriate for the business.

In addition, the auditor may also discuss with management in order to review the adequacy of the allowance for doubtful debt or uncollectible accounts receivable.

In the above procedures, the auditor wants to ensure the valuation and allocation assertion. This means that the allowance for doubtful accounts shall be properly calculated and recorded in the accounting book.

Assess Bad-debt Write-offs

The auditor will calculate the proportion of bad-debt expense to sales for this year and compare it with that of the prior year to see the reasonableness of the expense. They will analyze the necessary disclosure for bad debts and other significant events that are appropriately presented in the notes to the company’s financial statements.

Similar to the allowance for doubtful account, the assessment of bad-debt write-offs is to ensure the correct valuation and allocation as well as the presentation and disclosure .

Investigate Reconciling Items

The auditor should compare general ledger balances to actual receivables listing to confirm their accuracy. The auditor should review the justification for large amounts and the journal entries should be fully documented.

This is to ensure the accuracy and Completeness assertion.

Other Audit Procedures that Auditor should also Performs during the Course of the Audit

Below are the other audit procedures that auditor may carry out on the audit of accounts receivable:

• The auditor shall need to complete the disclosure checklist in order to ensure that an entity being audited has provided all relevant disclosures relating to the accounts receivable.
• Before selecting the sample for testing, the auditor shall ensure that he/she has properly cross-checked or performed the casting between the aged receivables sub-ledger or listing to General Ledger (GL) as well as the Trial balance
• The auditor shall do an inquiry from management to see if there is any evidence of receivables have been sold. In addition, the auditor may also obtain the loan agreements as well as the board minutes and perform the review to see any evidence of those receivables have been sold or not.

In other word, we usually call as accounts receivable factoring. Meaning that an entity sells the receivables to third parties or factoring companies.

In best practice, auditors shall perform the test of control first before they perform the tests of detail or substantive audit testing. After the control testing, if the auditor found any big or major risks and control deficiencies, they can perform an in-depth test of detail .

However, if there are minimal risks and there is a strong control measure in place within the company being audited, the auditor may consider reducing the level of testing in the substantive test procedures.

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What Are the Audit Assertions? Definition, Types, And Explanation

Definition:.

The implicit or explicit claims by the management on the preparation and appropriateness of financial statements and disclosures are known as management assertions . It is also known are financial statements assertion or audit assertion.

In other words, audit assertions are sometimes called financial statements Assertions or management assertions.

It means that management implicitly or explicitly claims that the value of assets, liabilities, income, expenses, and equity shown in financial statements are correctly measured and disclosed according to the applicable financial reporting framework.

Management assertions are primarily used by the external auditors at the time of audit of the company’s financial statements .

In this article, we will discuss the nature and the usage of each assertion as well as how important it is for management and auditors. At the end of this article, you can also see the summary of all assertions and their usages.

Well, audit assertions generally classified into three major categories

• Transaction Level Assertions
• Account Balance Assertions
• Represent and Disclosure Assertions

Transaction Level Assertions:

These assertions may be classified into the following five items

• Completeness: It means that all the business transactions related to the company’s business need to be recorded, and are recognized in the company’s financial statements . For example, the cost of direct and indirect materials is fully measured and recognized. All the sales transactions that occurred during the period are completely recorded in the financial statements
• Accuracy: It means that the actual value of transactions is fully recorded without any error. For example, the value of all direct and indirect costs of a product is accurately recorded or calculated without any error.
• Classification: This assertion means that transactions or items are classified and recorded in their proper accounts or classification. For example, salaries of office staff are classified and recorded as administrative expenses while wages related to the product department are recorded as production expenses. The loan is correctly classified as current and non-current assets.
• Occurrence: This assertion means that all the recorded transactions actually take place in the normal course of business. For example, the cost of material recognized in the financial statements has been incurred as a result of units produced in the company’s production department.
• Cut-Off : This assertion means that all the transactions are recorded in their respective periods or the correct period. For example, the cost of materials recognized in the financial statements relates to the current accounting period. Or the transactions are correct in the period that they have occurred.

Account Balance Assertions:

These assertions are classified into the following four items

• Rights and obligations: This means that the entity owns the ownership rights for all the assets recognized in the balance sheet and all the recognized liabilities are the obligations of the entity. For example, this assertion means that the inventory recognized in the entity’s balance sheet is owned by the entity while the balance of accounts payable is an obligation on the entity.
• Existence: Balances of assets, liabilities, and equity exist at the end of the period. For example, inventory recognized in the balance sheet exists at the end of the period.
• Completeness: Balances of assets, liabilities, and equity are recognized fully in the financial statements. For example, the value of all the inventory is recognized and nothing is left behind.
• Valuation: Balances of assets, liabilities, and equity have been recorded at their proper valuations. For example, the value of inventory is recognized at the lower of cost or net realizable value.

Presentation and Disclosure Assertions:

These assertions are classified into the following five items

• Accuracy: The assertion is that all the financial information included in the financial statements is disclosed accurately at their appropriate amount. For example, the balance of accounts receivable has been accurately disclosed .
• Occurrence: This assertion means that all the disclosed transactions have actually occurred for business purposes.
• Completeness: This means that all the transactions supposed to be disclosed in the financial statements have been disclosed completely.
• Understandability: This means that all the financial information in the financial statements is classified properly and presented in a view to understanding easily by the user.
• Rights and Obligation: All the disclosed rights and obligations are actually related to the audited entity.

Table of Assertions:

Are management assertion and audit assertion the same.

Management assertions and audit assertions are related concepts, but they are not the same thing.

Management assertions are the claims or representations made by management in the financial statements. In contrast, audit assertions are the tools or lenses used by auditors to examine and test those claims. Both are fundamental to the audit process, with the former being the subject of the audit and the latter guiding the methodology of the audit.

Here’s the distinction:

Management Assertions :

• These are claims made by the management regarding the recognition, measurement, presentation, and disclosure of items in the financial statements.
• For example, when management presents a balance sheet, they are asserting that the amounts presented for assets and liabilities are accurate and complete, and they have rights to those assets or obligations for those liabilities.
• Essentially, through the financial statements, management is asserting that the information provided is in accordance with the relevant accounting framework.

Audit Assertions :

• These are what auditors use as a framework to design their audit procedures and gather evidence.
• Audit assertions are derived from management’s assertions. They provide a structured way for auditors to examine the claims made by management in the financial statements.
• For instance, when an auditor is looking at a company’s accounts receivable balance, they might use assertions like “existence” (to confirm that those receivables actually exist) and “valuation” (to check if those receivables are presented at their appropriate value).

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Auditing of Accounts Receivable: Procedures, Risks, and Assertions

Accounts Receivable refer to the amounts owed to a company by its customers for goods or services that have been delivered but not yet paid for. In this article, we will cover the accounting treatment, audit risks, audit assertions, and audit procedures for auditing accounts receivable.

Accounting Treatment: Accounts receivable are recorded as an asset in the balance sheet and are typically classified as short-term assets. The asset is recognized when the company delivers goods or services to a customer and generates an invoice. When the customer pays the invoice, the asset is reduced, and cash is increased.

Audit Risks:

The following are the audit risks that auditors should consider when auditing accounts receivable:

• Misstatement of Accounts Receivable Balance: There is a risk of misstatement in the accounts receivable balance due to errors in recording or classifying transactions, incorrect calculation of amounts owed, or fraud.
• Unrecorded Accounts Receivable: There is a risk that some accounts receivable may be unrecorded, which can result in an understatement of the company’s assets and a corresponding overstatement of liabilities.
• Cutoff Misstatement: There is a risk of cutoff misstatement, meaning that some accounts receivable transactions may be recorded in the wrong period, which can impact the accuracy of the financial statements.
• Allowance for Doubtful Accounts: There is a risk that the allowance for doubtful accounts may be inadequate, resulting in an overstatement of the accounts receivable balance.
• Inadequate Internal Controls: There is a risk that internal controls over accounts receivable may be inadequate, which can increase the risk of misstatement and fraud.

Audit Assertions:

The following are the audit assertions that auditors should consider when auditing accounts receivable:

• Existence: The auditor should verify the existence of accounts receivable and the accuracy of the amounts owed.
• Valuation: The auditor should verify that the accounts receivable are accurately valued and recorded at the correct amount.
• Rights and Obligations: The auditor should verify that the company has the right to receive payment for the goods or services it has delivered and that the customers have the obligation to pay the accounts receivable.
• Presentation and Disclosure: The auditor should verify that accounts receivable are presented and disclosed in accordance with accounting standards.

Audit Procedures:

The following are the audit procedures that auditors should perform when auditing accounts receivable:

• Obtain an understanding of the company’s internal controls over accounts receivable.
• Perform substantive testing, such as examining invoices, sales orders, and receipts, to verify the existence and accuracy of accounts receivable.
• Perform analytical procedures, such as comparing accounts receivable balances to prior periods, to identify unusual transactions or trends.
• Verify the accuracy of accounts receivable cutoff by performing tests of transactions that occurred near the end of the period.
• Confirm accounts receivable with customers to verify the accuracy of the amounts owed.
• Review the allowance for doubtful accounts and perform procedures to test its adequacy.

Testing Net Book Value (NBV)

Valuation of assets, including net book value, is a crucial aspect of an audit, as it impacts the financial statements. The following are the steps involved in the audit procedure for the valuation of assets, particularly net book value:

• Understanding the client’s accounting policies: The auditor should understand the client’s accounting policies, including how they determine the net book value of assets.
• Review of the valuation process: The auditor should review the process used by the client to determine the net book value of assets, including the calculations and supporting documentation.
• Assessment of accuracy: The auditor should assess the accuracy of the net book value by comparing it to market values or other independent appraisals, if available.
• Testing of calculations: The auditor should perform tests of the calculations used to determine the net book value, including reviewing the supporting documentation and comparing the results to the prior period’s values.
• Consideration of impairment: The auditor should consider the potential for impairment of assets and evaluate whether the net book value is a fair reflection of the asset’s value.
• Documentation: The auditor should document the steps taken, observations, and conclusions reached during the audit procedure for the valuation of assets.
• Final opinion: The auditor should provide a final opinion on the fairness of the net book value presented in the financial statements.

Auditing accounts receivable is a critical component of the financial statement audit. Auditors should consider the accounting treatment, audit risks, audit assertions, and audit procedures when auditing accounts receivable to ensure the accuracy and reliability of the financial statements.

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