Activity Based Risk Evaluation Model of Auditing

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Management assertions

There are two categories ^[fn] of assertions by management that are of particular concern to auditors:

• internal control assertions, and
• financial statement assertions.

Internal control assertions

Management is responsible for the internal control procedures it establishes. There is an implied assertion by management that such internal control procedures are effective as to both their design and operation. The auditor advises management of deficiencies in significant internal control procedures of which s/he becomes aware.

Financial statement assertions
(including account balance and class of transaction assertions)

Auditors are not responsible for the preparation of the financial statements of an entity. This is the responsibility of management. The financial statements prepared by management for audit are a collection of assertions as to both the state of affairs of the entity at balance date and the results of its operations for the period ended on that date. In broad terms, management is asserting to the auditor that the financial statements, and by implication the financial statement items and underlying account balances and classes of transaction, are free of (material) misstatement. That is, that the financial statement items, and underlying account balances and classes of transactions are, in all material respects, complete , valid and accurate . One of the principal objectives of the auditor is to add credibility to these assertions.

This broad concept of financial statement assertions can be broken down by level of aggregation and depicted in tabular form as follows.

LEVEL OF AGGREGATION	ASSERTIONS
	Completeness	Validity	Accuracy
Financial statement item level	All valid account balances are included in the financial statement item.	All account balances included in the financial statement item (i) do exist and (ii) do pertain to the entity as at balance date.	All valid account balances included in the financial statement item are accurate as to (i) valuation and (ii) presentation and disclosure.
Account balance level	All valid assets, liabilities, equities, revenues and expenses are included in the account balance.	Balance sheet account balances: All assets, liabilities and equities included in the account balance (i) do exist and (ii) are owned (controlled) by, or owed by, the entity as at balance date. Income statement account balances: All income and expenses included in the account balance (i) do pertain to the entity and (ii) have occurred during the relevant period.	All valid assets, liabilities, equities, revenues and expenses included in the account balance are accurate as to (i) valuation and (ii) classification.
Class of transaction level	All valid economic events are included in the class of transaction.	All economic events included in the class (i) do pertain to the entity and (ii) have occurred during the relevant period.	All valid economic events included in the class are accurate as to (i) value and (ii) description.

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