ISA 500 Audit Evidence - Financial Statement Assertions

Financial Statement Assertions

It is stated in ISA 500 that the auditor should use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures.

The auditor uses assertions in assessing risks by considering potential misstatements that may occur, and thereby designing audit procedures that are responsive to the particular risks.

Assertions used by the auditor fall into the following categories:
(a) Assertions about classes of transactions and events for the period ended:

1. Occurrence
2. Completeness
3. Accuracy
4. Cut-off
5. Classification

(b) Assertions about account balances at the period end:

1. Existence
2. Rights and obligations
3. Completeness
4. Valuation and allocation

(c) Assertions about presentation and disclosure:

1. Occurrence
2. Completeness
3. Classification and understandability
4. Accuracy and valuation

The assertions are not individually assessed but quite often at the same time. For example, to ensure completeness of electricity expense, the auditor ensures the 12 months of payments were booked. Since the client may record the bills paid on a cash basis, electricity expense of a month of previous basis period might be entered in the current year. Electricity expense of last month of current year might be recorded next year.If the monthly fluctuation is immaterial, the auditor always ignore the cut-off issue. In case where electricity is a material expense, the auditor considers preparing adjustments for year ended cut-off purpose so that the profit or loss would not be materially misstated.

Methods or techniques of audit evidence gathering are classified in 6 categories:

1. Inspection
2. Observation
3. Inquiry
4. Confirmation (audit)
5. Re-performance
6. Analytical procedures

For example, the auditor perform vouching to ensure such electricity expense occurred and whether correct amount was booked. The auditor compares electricity expense of current and last year to see whether there are fluctuations. If there are huge fluctuations, the auditor may examine electricity together with rental expense, water expense to find out reasons.