You didn’t get this right if you think we are going to talk about an internal audit of financial statements.
But yes indeed we’ll be covering how the skill of auditing financial statements comes in handy for internal audit of ….. well almost everything, be it an assurance or even an advisory / consulting internal audit engagement.
Well, how is that possible you would ask? Here’s how:
| ?s | As |
| What is the single most imperative constituent of any engagement process be it assurance or consulting? | Review / Analysis / Examination |
| Of what exactly? | Data / Records / Information |
| What do we need to establish about the data / records / information before diving in and unravelling its mysteries? | Credibility |
| How do we establish that credibility? | Satisfying ourselves of assertions held by the data / records / information |
| Who makes those assertions? | The client submitting the data / records / information |
But what are those assertions anyway and how are these relevant to internal audit? Whilst their purpose and use in context of audit of financial statements is adequately understood, in this space we’ll try to give some more clarity on their underlying meaning and correct use as well, apart from their internal audit utility. So, let’s get right to these.
The assertions for financial statements are classified into two distinct categories:
- For Assets, Liabilities and Equity that make up the Statement of Financial Position / Balance Sheet
- For Income and Expenses that make up the Statement of Profit or Loss
We’ll look at those assertions that are common under both categories.
| Assertions | Meaning | Uses |
| Existence / Occurrence |
The balances representing assets, liabilities and equity on the books of account do exist. The transactions recorded in books of account have occurred. |
To ensure only those balances and transactions are recorded that exist / have occurred. |
| Completeness |
All assets, liabilities and equity interests that are controlled / owned by the entity are fully recorded in its books of account. All transactions that should have been recorded, have been recorded. |
To ensure all transactions and resulting balances from the business transacted by the entity have been fully recorded. |
| Accuracy |
The amounts of all assets, liabilities and equity recorded are accurate. The recorded amounts representing the transactions are accurate. |
To ensure that recording is in correct amounts of business transacted and balances valued. |
| Classification |
The assets, liabilities and equity have been classified correctly; recorded in their respective accounts. The transactions have been recorded in their respective accounts and thus correctly classified. |
To ensure balances and transactions are recorded in the correct account heads. |
| Presentation |
The presentation of assets, liabilities and equity balances is adequate to their nature in accordance with the applicable reporting framework. The transactions are adequately presented in accordance with the applicable reporting framework. |
To ensure that the applicable reporting framework has been followed for presenting the balances and transactions. |
Please note that, for satisfying all these assertions barring one, the external auditors must begin from the books of account and test and trace back to their origin. The one exception is the Completeness assertion that requires auditors to begin from the origin, tracing and testing back to the books of account. Similarly, there’s another assertion under the Profit or Loss category only that also requires backwards working for it to be satisfied, Cut-Off assertion.
Both these Completeness and Cut-Off assertions are extremely pivotal for internal auditors. However, the Presentation assertion is not relevant to most internal audit engagements. So, let’s now focus on how all the relevant assertions assist the internal auditors providing assurance and consulting services.
| Assertions | Internal Audit Objectives |
| Existence / Occurrence | Ensuring that the data / records / information under review by internal auditors reflects transactions and events that have genuinely occurred, and balances reflect assets and liabilities that physical or evidentially exist. |
| Completeness | Ensuring that the data / records / information being reviewed, pertaining to an account under review is complete and that no remnant data / records / information pertaining to that account has been left out. |
| Cut-Off | Ensuring that the data / records / information under review pertains to all transactions and events of the period under review and that it doesn’t comprise entries pertaining to other periods. The data / records / information agrees with the underlying records. |
| Accuracy | Ensuring the data / records / information under review is accurately measured and recorded in accordance with the underlying records. |
| Classification | Ensuring that the data / records / information being reviewed is classified correctly in the base records. |
Put simply, the internal auditors first have to ensure that the data / records / information they obtain to perform an assurance or an advisory engagement has these essential hallmarks:
- It must be a genuine representation of facts. Existence / Occurrence
- It should be a complete account in all respects. Completeness
- It should pertain to the audit period. Cut-Off
- It should be an accurate account. Accuracy
- It should pertain to correct accounts / classified correctly. Classification
To provide diligent assurance or consulting, we need to be substantively assured of the credibility of the records first! And performing procedures to satisfy these assertions is first and foremost.
So, learning a thing or two from external auditing certainly goes a long way in internal auditing!