Why is it important to emphasize the existence assertion when auditing accounts receivable?
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Substantive audit procedures are the activities that auditors perform to assess the risk of material misstatements or instances of fraud at the assertion level. As opposed to the testing of controls, substantive procedures focus on amounts and include detailed testing of classes of transactions, account balances and disclosures. Substantive analytical procedures are also included. Show
Audit Procedure for Accounts ReceivableAuditors perform substantive analytical procedures at the planning and review stages of an audit. These procedures include comparison of a company's financial information with comparable financial information from past records; the company's anticipated results, such as forecast or budgets; or financial information of another company from similar industry. Auditors conduct these comparisons at the transaction's class level and the assertion level, and they generally ask management about the availability and reliability of the comparable information. If there are differences, then an investigation must follow. Verification by ConfirmationTo verify completeness, valuation and cut-off assertions, auditors send confirmation requests to debtors and third parties. They first test the reconciliation of accounts receivable balances to the general ledger. They then select relevant account balance items either on a judgmental basis or using audit software, and prepare confirmation requests for these items, advises Accounting Tools. They ask the recipients to respond with negative or positive confirmation and use the responses to verify the company's information. Performance of Alternative ProceduresExternal parties don't always respond to confirmation requests, and when they don't, auditors must perform alternative audit procedures. This involves tracing subsequent cash receipt records or invoices and supporting documentation. If the company didn't receive significant repayments from debtors in a subsequent period, the auditors will address this concern with the organization's managers. To verify the valuation assertions, validity, and recording and presentation, auditors also perform tests of the journal entries in accounts receivable and the subsidiary ledgers. They also perform aging analyses to check long outstanding debts, suggests Zoho. GAAP ConsiderationsCompanies must prepare and present their financial statements according to a financial reporting framework, and in United States, when companies share their financial information with the public, they must use generally accepted accounting principles, or GAAP, to prepare their financial statements. Therefore, it is the auditor's role to determine that the accounting policies and procedures related to accounts receivables are appropriate and are applied consistently according to GAAP. They also validate that the company presents and discloses its accounts receivable balances in the balance sheet and its accompanying notes properly. Claims that establish whether or not financial statements are true and fairly represented in auditing What are Assertions in Auditing?Assertions are claims that establish whether or not financial statements are true and fairly represented in the process of auditing. Importance of AssertionsAssertions are an important aspect of auditing. Since financial statements cannot be held to a lie detector test to determine whether they are factual or not, other methods must be used to establish the truth of the financial statements. Assertions are defined as “a statement that is believed to be true by the speaker. “An assertion can be anything, e.g., “I assert that fundamental value investing is the best investing philosophy.” However, it is difficult to measure whether the statement is indeed true. Similarly, with financial statements, it is difficult to determine what financial information is free from material misstatement. There are two aspects to material misstatement. Clearly, materiality plays a large role; however, how to measure what information is true and fair or misstated is crucially important. Assertions play a key role in determining what is true and fair when auditing financial records. Assertions in AuditingAssertions are characteristics that need to be tested to ensure that financial records and disclosures are correct and appropriate. If assertions are all met for relevant transactions or balances, financial statements are appropriately recorded. The International Financial Reporting Standards (IFRS) are a set of accounting standards issued by the International Accounting Standards Board (IASB) and the IFRS Foundation aimed towards providing a common set of accounting rules that are consistent, transparent, and comparable internationally. IFRS developed ISA315, which includes categories and examples of assertions that may be used to test financial records. There are two types of assertions, each of which relates to different events: 1. Transaction Level AssertionsTransaction level assertions are made in relation to classes of transactions, such as revenues, expenses, dividend payments, etc. There are five types of transaction-level assertions:
2. Account Balance AssertionsAccount balance assertions apply to the balance sheet items, such as assets, liabilities, and shareholders’ equity. There are four types of account balance assertions:
3. Presentation and Disclosure AssertionsIt is the third assertion type that can fall under both transaction-level assertions and account balance assertions. It relates to the presentation and disclosure of financial statements. There are four types of presentation and disclosure assertions:
Related Readings Thank you for reading CFI’s guide to Assertions in Auditing. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
What are the audit assertions for accounts receivable?The primary relevant accounts receivable and revenue assertions are:. Existence and occurrence.. Completeness.. Accuracy.. Valuation.. Cutoff.. Why are assertions important to auditors?Assertions are an important aspect of auditing. Since financial statements cannot be held to a lie detector test to determine whether they are factual or not, other methods must be used to establish the truth of the financial statements. Assertions are defined as “a statement that is believed to be true by the speaker.
What are the most important assertions in auditing accounts payable and why?The primary relevant accounts payable and expense assertions are: Existence. Completeness. Cutoff.
What is existence in auditing?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.
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