Financial Report Assertions and Audit Procedures

Financial Report Assertions and Audit Procedures

Assertions about Classes of Transactions and Events (Purchases)

Occurrence

• Definition: The transactions giving rise to purchases occurred during the period.
• Audit Objective: To verify that recorded purchase transactions actually happened during the accounting period.
• Substantive Audit Procedures:
  • Select transactions from the purchases journal and agree to supporting documentation (e.g., goods received note). This involves tracing a sample of recorded purchases back to source documents to confirm their validity.

Completeness

• Definition: All purchases transactions and events that should have been recorded have been recorded.
• Audit Objective: To ensure that all purchase transactions that occurred during the period were actually recorded in the accounting records.
• Substantive Audit Procedures:
  • Test from supporting documentation (purchase invoice, goods received note) to the purchases journal or subsidiary ledger. This involves tracing a sample of purchase invoices and goods received notes to the accounting records to confirm that they were recorded.

Accuracy

• Definition: Purchases amounts and other data are recorded appropriately.
• Audit Objective: To verify that the recorded purchase amounts and other related data (e.g., supplier name, date) are accurate.
• Substantive Audit Procedures:
  • Check the dollar value of purchases to supporting documentation (purchase invoice) and ensure that other data such as the supplier's name is recorded accurately. This involves comparing the details of recorded purchases with the corresponding purchase invoices to confirm accuracy.

Cut-off

• Definition: Purchases are recorded in the correct period.
• Audit Objective: To ensure that purchase transactions are recorded in the appropriate accounting period (i.e., neither prematurely nor delayed).
• Substantive Audit Procedures:
  • Check that the last purchases recorded before the balance date and the first purchases recorded after the balance date are recorded in the correct period. Consider when received by evidence of goods received note. This involves examining purchase transactions around the end of the accounting period to ensure they are recorded in the correct period, based on when the goods were received.

Classification

• Definition: Purchases are recorded in the proper accounts.
• Audit Objective: To verify that purchase transactions are recorded in the correct general ledger accounts (e.g., purchases, inventory).
• Substantive Audit Procedures:
  • Enquire and scan to determine that purchases are recorded correctly in accordance with the chart of accounts. This involves reviewing the chart of accounts and examining purchase transactions to ensure they are classified appropriately.

Presentation

• Definition: Purchases are appropriately aggregated and clearly described, and related disclosures are relevant and understandable.
• Audit Objective: To ensure that purchases are presented in the financial statements in a clear and understandable manner, with appropriate disclosures.
• Substantive Audit Procedures:
  • Check that purchases and cost of goods sold (COGS) are in accordance with the accounting framework. This involves reviewing the presentation of purchases and COGS in the financial statements to ensure they comply with accounting standards and are presented in a clear and understandable manner.

Assertions about Account Balances (Inventory)

Existence

• Definition: Inventories included in the statement of financial position physically exist and represent items held for sale in the ordinary course of business.
• Audit Objective: To verify that the inventory items listed on the balance sheet physically exist and are held for sale.
• Substantive Audit Procedures:
  • Inspect physical inventory (check from inventory records to physical stock). This involves physically examining inventory items and comparing them to inventory records.
  • Undertake substantive analytical procedures. This involves analyzing inventory levels and trends to identify potential issues.
  • Confirm stock held at other locations. This involves verifying the existence of inventory held at warehouses or other locations.

Rights and Obligations

• Definition: Inventory in the statement of financial position is owned by the entity and excludes items billed to customers or owned by others.
• Audit Objective: To verify that the entity has legal ownership of the inventory and that the inventory does not include items owned by others.
• Substantive Audit Procedures:
  • Enquire about legal ownership of goods being shipped to the entity and any goods on consignment, and inspect supporting documentation. This involves reviewing purchase agreements and other documents to verify ownership.

Completeness

• Definition: Inventory in the statement of financial position includes all inventories on hand at the balance date, or in transit or at other locations, that are the property of the entity.
• Audit Objective: To ensure that all inventory owned by the entity is included in the inventory balance.
• Substantive Audit Procedures:
  • Inspect physical inventory (check from physical stock to inventory records). This involves physically examining inventory items and comparing them to inventory records.
  • Undertake substantive analytical procedures.
  • Enquire about stock held at other locations, and review purchase documents for shipping terms for inventory in transit. This involves verifying that all inventory is properly accounted for, including goods in transit.

Accuracy, Valuation, and Allocation

• Definition: Inventory in the statement of financial position is stated at the correct amount with respect to cost determined by an acceptable method consistently applied and slow-moving, excess, defective, and obsolete items identified are reduced to net realisable value if lower than cost.
• Audit Objective: To verify that the inventory is valued at the correct amount, using an acceptable method, and that obsolete or slow-moving items are properly written down.
• Substantive Audit Procedures:
  • Undertake tests of pricing and summarisation. This involves verifying the accuracy of inventory costs and extensions.
  • Undertake substantive analytical procedures.
  • Observe physical inventory (look for obsolete or damaged items). This involves physically examining inventory to identify obsolete or damaged items.
  • Enquire of management and scan inventory records to identify any obsolete, excess, or slow-moving inventory.
  • Check subsequent sales prices and compare with cost. This helps determine if net realizable value is below cost.

Classification

• Definition: Purchases have been recorded in the proper accounts
• Audit Objective: To check purchase classifications are correct.
• Substantive Audit Procedures:
  • Check that purchases are correctly classified.

Presentation

• Definition: Purchases (and COGS) are clearly described and all related disclosures are understandable.
• Audit Objective: To verify the financial statement presentation is clear and understandable.
• Substantive Audit Procedures:
  • Read draft financial report to ensure clear description and understandable disclosures.