ACCT 5014

Assertions, objectives and

initial planning
Learning objectives

• Develop an understanding of management assertions

• Develop an understanding of audit objectives

• Develop an understanding of transaction and balance

related audit objectives

• Understand the importance of audit evidence (ASA500)

and different approaches of collecting evidence
The auditor is expressing an
opinion on three things:
1. The dollar amounts in the financial reports are reliable (correct)

2. The financial reports are prepared in accordance with the mandatory

requirements (eg: Corporations Act, Accounting Standards)

3. The entity is a going concern as per ASA570

Notice what this list does NOT
include:
• The auditor does not assess the efficiency of the use of the
resources

• The auditor does not assess the performance of management and

whether they can improve

• The auditor does not provide an opinion as to how the entity can
improve their performance
Two terms we need to make sure we understand as soon as possible
are:

• Audit Objectives
• Management Assertions

• Audit Objectives are created to help an auditor determine what

needs to be done in an audit to be able to form an opinion regarding
the reliability of the financial reports.

• Management Assertions guide the management to that the

information prepared in the financial reports is reliable.
 What is an assertion?

I am a lecturer
I love auditing

You are my student

Grass is green
The sky is blue
 Management assertions
Management will:

1. assert that the transactions are processed correctly

2. assert that the balances in the reports are correct/reliable
3. assert that the information in the reports is disclosed correctly
(refer to page 123)

Management “asserts” that financial statements meet the

objectives of the Financial Reporting Framework regarding
recognition, measurement, and presentation and disclosure of their
entity’s financial statements.

• Assertions are used by the auditor to consider the different types of

potential misstatements that may occur when identifying, assessing
and responding to the risks of material misstatement.
 Management Assertions

There are three sets of Assertions

1. A set of assertions relating to the
transactions

2. A set of assertions relating to the

final balances

3. A set of assertions relating to the

presentation and disclosure of the
information

ASA 315 para A190

 Management assertions: transactions
(pg. 122-123)

• Occurrence—transactions that have been recorded or disclosed have occurred, and

such transactions and events pertain to the entity.
• Accuracy—amounts and other data relating to recorded transactions and events
have been recorded appropriately, and related disclosures have been appropriately
measured and described.
• Completeness—all transactions that should have been recorded have been
recorded, and all related disclosures that should have been included in the
financial statements have been included.
• Cutoff—transactions have been recorded in the correct accounting period
• Classification—transactions and events have been recorded in the proper accounts.
 Management assertions: balances

Existence—assets, liabilities and equity interests exist.

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.

Rights and Obligations [Ownership] — the entity holds or controls the rights to
assets, and liabilities are the obligations of the entity.

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.
Management assertions: presentation
and disclosure
Now that the numbers are taken care of, we look at the presentation and disclosure of the
numbers in the financial reports:

• Occurrence (have disclosed events actually occurred?)

• Rights and Obligations (are the disclosed events assets/liabilities of the entity?)

• Completeness (have all required disclosures been included?)

• Accuracy and Valuation (disclosed fairly and appropriate amounts)

• Classification (amounts in the reports are appropriately classified?)

 Management assertions in the audit process

• The importance of management assertions is that (reframed) they

form audit objectives

Assertion: All trade receivables shown in the financial statements

are collectable

Audit objective: To prove within reason that all trade receivables

shown in the financial statements are collectable

• Suggested audit test to prove collectability: Test amounts received

from credit customers after the year-end

8
 How to do an audit!

If we focus on testing the management assertions,

and we can show that the assertions have been
met by management, we can say that the reports
are reliable.

Therefore, an audit is testing the management

assertions and determining if they are operating
effectively in producing the financial information.
 Steps to develop audit objectives
1. Understand overall objectives
& responsibilities for the audit.

2. Divide financial statements into

segments

3. Use management assertions to

develop audit objectives

Auditors divide the audit into segments or ‘cycles’

Have a look at page 119 of the textbook relating to
Rouge Clothing Company Ltd.

Objectives of Auditors and Management in Preparing and

Auditing Financial Statements can be seen from
examining the flows of transactions:
 Transaction Flow Example

Ledger, Trial Balance, &

Transactions Journals Financial Statements

Sales
Sales
journal General ledger
and subsidiary records

Cash
Cash receipts
receipts
journal General ledger
trial balance
Acquisition
of goods Purchases Financial
and services journal statements
 Transaction Flow Example

Ledger, Trial Balance, &

Transactions Journals Financial Statements

Cash payments
Cash payments journal General ledger
and subsidiary records

Payroll services
Payroll
and payments
journal General ledger
trial balance
Allocation &
adjustments General journal Financial
statements
 Audit objectives

To test the Management “Assertions”,

Auditors use objectives in two principal areas:

1. Transaction Related audit objectives,
• To audit the processing of transactions

2. Balance Related audit objectives

• To audit the final Balances in the General
ledger at year end
Transaction-related objectives

Focus on identifying and testing whether the source documents

(eg invoices, sales orders, purchase orders) have been
processed properly;
- have the source documents been processed in the correct
journals/ledgers? Have they been processed accurately, are
they complete, are they authorised, in the right accounting
period?

Transaction related objectives (and tests of transactions)

focus on the specialised journals and the general and
subsidiary ledgers (eg Accounts Payable and Accounts
Receivable subsidiary ledgers)
Another way of looking at it is that the tests finish with the
unadjusted trial balance (refer back to when you studied
Fianncial Accounting in your earlier studies and were
introduced to Journals and ledgers)
Balance-related objectives

Focus on identifying and testing whether the final balances

in the financial reports reflect the operations of the entity
during the reporting period
Note – this does not involve processing of
transactions. The transactions have already been
recorded in the specialised journals

Even though the transactions may have been processed

correctly, the final balance(s) shown in the financial
reports could still be incorrect

Eg: Inventory
purchases and sales are all recorded correctly in the
journals but what if the recorded inventory does not reflect
the lower of cost and net realisable value on the reporting
date?
Don’t get scared by new auditing terms

This lecture is introducing a lot of new information to you

and many new terms. Don’t be scared of what you are
seeing. The difference between transactions and balances
is simply:

Transactions – the event is being recorded in the

journals and posted to the ledgers

Balances – the numbers found in the ledgers are checked if

they need to be adjusted.

Together, the testing of the transactions and the balances

means the auditor will test whether the numbers are
correct.
Revisiting prior knowledge: adjustments
• Adjustments occur because we create an arbitrary point
in time in accounting when we want to summarise how
a business is performing (balance date).

• This means that if a cash flow occurs in one period and

the income/expense associated with that cash flow is not
completely incurred/earned during the same reporting
period, and adjustment must occur to show that the
income/expense will continue to be earned/incurred in the
following reporting period.

• Adjustments (due to their nature, amount and complexity)

are a major source of potential misstatement in the
financial reports and hence represent a very important
aspect of assessing information risk.
Audit objectives
How are audit objectives tested?
Auditors plan to gather sufficient information about the reliable processing of
transactions, and whether the year end balances are reliable by examining
records and documentation, by enquiries, checking and other audit procedures.

That is – auditors gather sufficient appropriate evidence to be able to form their

opinion (ASA 500)
Audit evidence decisions

1. What evidence do I need? (which audit procedures to

use)
2. Which items to select from the population?
3. How many items to audit for a given procedure?
4. When to perform the audit procedures?
Audit evidence: ASA 500

• Physical examination (A20)

• Confirmation (A22)

• Documentation (A17)

• Analytical procedures (A25)

• Enquiries of the client (A26)

• Re-performance (A24)

• Observation (A21)
Planning and audit and designing an approach

1. Accept client

2. Understand the client’s business and industry

3. Assess client’s business risk

4. Perform preliminary analytical procedures

5. Set materiality and assess acceptable audit risk (AAR)

6. Understand internal control and assess control risk

7. Develop overall audit plan and audit program

Client acceptance (APES 110.210)

• Identify reasons for audit

• Obtain understanding with the client (Issue Engagement

letter – example in textbook and ASA 210/Figure 6.3 in
text)

• Engagement letter makes clear the responsibilities

of the auditor and arrangements for the audit

• Select staff

• Evaluate need for outside specialists

 Identifying risks (ASA 315)

We will be expanding on the requirements of ASA315 in the

topic of materiality and risk in the coming weeks

Perform Preliminary Analytical Procedures (ASA

520)

Involves computation of ratios and comparison of recorded

amounts to auditor expectations

Used in planning to understand the client’s business and

industry

Used throughout the audit to identify possible misstatements,

reduce detailed tests and assess going concern issues
 Audit documentation (ASA 230)

Auditor must document matters that are important in

providing evidence that the audit was carried out in
accordance with auditing standards

Working papers must support the audit opinion (Documentation = “working

papers)