An auditor’s view of your financial statements

An auditor’s view of your financial statements

Your representations. Representations to the user. That’s how the auditor, in planning their audit of the draft financial statements you’ve just delivered to them, will see them. One overall explicit representation, and, as a consequence of that representation, many, explicit and implicit, subsidiary representations.

Auditors call these subsidiary representations ‘assertions’. (If you are a user of the statements, keep reading; you may gain a greater understanding of what the financial statements tell you.)

Auditors use these assertions ‘to consider the different types of potential misstatement that may occur.’[i] This occurs in the planning phase of the audit, as part of their identification and assessment of the the risks of material[ii] misstatement, both at the financial report level (your overall representation), and at the assertion level (your subsidiary representations).

The overall representation you are making is that the financial report is in accordance with the ‘applicable financial reporting framework’, for instance, the cash basis of accounting. The subsidiary assertions, which flow from the reporting framework, are about the classes of transactions, account balances and disclosures in the statements– their recognition, measurement, presentation and disclosure. That is, about the contents of the three reports usually required – the Income Statement, the Balance Sheet, and the Cash Flow Statement. (Or, in the case of our example, the cash basis of accounting, just a Statement of Cash Receipts and Payments.)

Here’s how the profession[iii] describes these assertions:

Classification Is the balance or transaction recorded in the proper account?
Existence Does the asset, liability or equity interest exist?
Accuracy Are the amounts recorded correctly?
Occurrence Did the transaction actually occur?
Rights and obligations Does the entity have the right or obligation associated with the balance?
Valuation & allocation Is the balance correctly valued and the resulting valuation or allocation adjustments appropriately recorded?
Cut-off Is the transaction recorded in the correct period?
Completeness Have all assets, liabilities & equity interest, transactions and events been recorded?
Presentation & disclosure Is the balance or transaction appropriately disclosed in terms of occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation?

Perhaps now you can see the reason for some of the questions that the auditor asks you.

And the fee they charge (or give up).


P.S.  Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the least, last and lost of the world.





[i] Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through the Entity and Its Environment, Auditing and Assurance Standards Board, June 2011, paragraph.4(a)

[ii] For what errors, omissions and misstatements may remain in the accounts, after an audit, due to the ‘materiality’ restriction, see here.

[iii] Small Entities Audit Manual, CPA Australia Ltd, 2014, page 1:18.

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