Understanding Financial Statement Assertions (Part 2)

Hi readers!  My name is Gus Patel, and I have offered to help with updates to content on the UFE Blog.  I have recently been in your situation, having written the 2013 UFE.  Currently, I work as an Audit Senior at BDO Canada LLP.  In my spare time, I enjoy being active, as well as teaching students about accounting concepts.

Today we continue the discussion of financial statement assertions from yesterday.

Before getting into the specifics of each assertion, it might be helpful to understand why aspiring CA’s should care.

Audit Assertions

Why are audit assertions important to auditors?

From the above chart, we can see that at the end of the day, the real essence of addressing assertions are to evaluate management’s overall position on the financial statements, either about transactions and events for the period under audit (See CAS 315 – A.124), or otherwise known as the income statement assertions or assertions about account balances that are at period end – or balance sheet assertions and finally presentation and disclosure assertions.  Presentation assertions will not be covered in this post to focus on the most popular assertions on the UFE:

So what are the assertions and how can you pair them with a correct procedure?

Existence (or Occurence if you are referencing the Income Statement side)

This is essentially understood as management’s claim that the amounts recorded are actually genuine, or “exist”, and are not ficticious transactions.  An existence error essentially is an account overstatement (i.e. something isn’t there when it is recorded that it is).  An easy procedure to address whether anything exists is to actually physically verify.  Auditors can physically count cash, inventory, or obtain confirmations on receivable balances.


Completeness is management’s claim that all transactions to be included are included, or “complete”.  A completeness error would be an understatement (i.e. something is there which isn’t recorded).  Therefore, an easy procedure to verify completeness is to do a floor-to-sheet count.  Another example could be having auditors verify accruals are accurate through subsequent testing of related expenses.


All data (amounts) relating to the transactions are properly recorded.  A good way to remember accuracy is to think of cases where there is something that management needs to calculate in order to arrive at an account balance.  For example, foreign exchange needs to be accurately recorded, and a procedure to address the accuracy of foreign exchange would be to recalculate and compare to what management has recorded.


Ensuring appropriate cutoff means accounting for every transaction that occurred during the (financial statement) period without either aggressively recording entries which are within the next-periods transactions, or postponing the recording of transactions until the next period.  An easy way to remember cut off is to think of revenue or balance sheet liabilities, things that management might be interested in delaying or accelerating due to bias for either obtaining a management bonus, or for covenant compliance.  A procedure to address cut off is to determine the date of the transaction, either the sale or liability in this case.


Transactions occurring are within the correct accounts.  For example,  your revenue recorded really isn’t an expense, or an asset really isn’t a liability.

Rights and Obligations (balance sheet assertion only)

The entity holds the “right” or actually controls the asset or liability.  For instance, an entity has the legal “right” to record property plant and equipment on the balance sheet if they have entered into a purchase agreement, and funny enough, the easy way to verify that is to look at the purchase agreement!

Valuation and Allocation (balance sheet assertion only)

Assets, liabilities and equity are included in the financial statement presentation at appropriate amounts, and all valuation adjustments are properly recorded in accordance with the financial reporting framework being used.  Measurement of valuation can either be: fair value, historical cost, present value or a method of allocation of joint costs.  Procedures to verify this could be comparing market data to ensure inventory does not require a write down, or evaluating the collectibility of receivables greater than 90 days – asking the question: is it really collectible?

Once you understand what the assertions are, the next challenging part is identifying which assertion addresses the real risk, because remember, all balance sheet assertions have: existence, rights and obligations, completeness and valuation and allocation assertions, and all income statement items have occurrence, completeness, accuracy, cutoff and classification assertions!

Again, remember these assertions are all in your CICA Handbook and can be referenced during your practice exams and in a pinch, even during the UFE! However, if you’re getting started now, procedures will be second nature to you.


Creating good procedures on the UFE

Continuing from yesterday, today we put the P in RAMP and cover one of the most important aspects of assurance which is creating good procedures.


Procedures are often the most critical part of your audit planning memo and most often specifically asked for so you’ll have to get good at these. I felt like the 2010 UFE was full of procedures. With procedures you want to focus on the key risk areas in the simulation which is related to audit risk and also often related to accounting issues in the simulation. Here are some things that a good procedure will cover off.

  • Specify how to audit the risk – you’ll need to give a specific procedures to be performed (i.e. inventory count, reconciliation, send out confirmations, etc.) The more specific and non-generic the better. Include specific steps such as observing an inventory count, match x to y, and so forth. These must be very specific to your simulation and shouldn’t be generic. Specificity is the key with procedures so make sure to specify what the overall procedure is (i.e. inventory count) and then some additional detail related to the case (such as for example: by weighing a number of widgets in each crate and multiplying it against an average weight).
  • Specify why you are testing this area, why is it a key risk area? This could be covered off in audit risk as well.
  • Specify what assertion you are testing – Make sure this makes sense, doing an inventory count might be great for existence or completeness but probably poor for accuracy and occurrence. It’s important you understand the assertions and what they mean so that your procedure makes sense.

You’ll want to try and give a good procedure for each risk if possible and, again, the number of procedures to shoot for in many cases is 3-4 valid procedures, but obviously use your judgment and experience in determining how many to write.

One additional insight about what the Evaluation Board expects from procedures can be found on page 8 in the 2010 UFE Report.

Candidates are encouraged to always consider the effectiveness of the procedures they provide. Procedures should address the risk area identified. In addition, when presenting an audit plan to an audit committee or a client, candidates should explain why the procedure is necessary, in other words, how it would successfully address the client’s assurance needs.


Last thing: with all of the above, I want to stress that it’s important to use case facts often and clearly when discussing each element. Generic discussion or knowledge “dumps” are seldom rewarded on the UFE so get in the habit early of using lots of case facts in your discussions.

What kind of trouble are you having with procedures?

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