Audit Evidence and Management Assertions
Audit evidence and assertions form the backbone of the AUD section. Every audit procedure is designed to address one or more management assertions. Understanding these assertions and the evidence that supports them is essential for the CPA exam.
Management Assertions by Category
| Category | Assertion | Definition |
|---|
| Transactions & Events | Occurrence | Recorded transactions actually occurred during the period |
| Completeness | All transactions that should be recorded have been recorded |
| Accuracy | Amounts and data are recorded correctly |
| Cutoff | Transactions are recorded in the correct accounting period |
| Classification | Transactions are recorded in the proper accounts |
| Account Balances (Period End) | Existence | Assets, liabilities, and equity interests exist at period end |
| Rights & Obligations | The entity holds rights to assets and has obligations for liabilities |
| Completeness | All balances that should be recorded are included |
| Valuation & Allocation | Balances are recorded at appropriate amounts and adjustments are proper |
| Presentation & Disclosure | Occurrence / Rights & Obligations | Disclosed events occurred and pertain to the entity |
| Completeness | All required disclosures are included |
| Classification & Understandability | Information is appropriately classified and clearly expressed |
| Accuracy & Valuation | Disclosed information is at appropriate amounts |
Types of Audit Evidence (Ranked by Reliability)
| Evidence Type | Description | Reliability | Example |
|---|
| Physical examination | Direct inspection of tangible assets | Highest | Inventory count, cash count |
| Confirmation | Direct written response from independent third party | Very High | Bank confirmations, AR confirmations |
| Inspection of documents (external) | Examination of externally created documents | High | Vendor invoices, bank statements |
| Recalculation | Auditor independently recalculates amounts | High | Recomputing depreciation, verifying totals |
| Analytical procedures | Evaluating financial data through ratios, trends, comparisons | Moderate | Comparing gross margin to prior year and industry |
| Observation | Watching a process being performed | Moderate | Observing inventory count procedures |
| Inspection of documents (internal) | Examination of internally created documents | Lower | Purchase orders, internal memos |
| Inquiry | Asking questions of management and staff | Lowest (alone) | Asking about contingent liabilities |
Common Audit Procedures Mapped to Assertions
| Procedure | Primary Assertion Tested | Account Example |
|---|
| Send AR confirmations | Existence, Valuation | Accounts Receivable |
| Trace shipping docs to sales journal | Completeness | Revenue |
| Vouch sales journal to shipping docs | Occurrence | Revenue |
| Search for unrecorded liabilities | Completeness | Accounts Payable |
| Inspect title documents | Rights & Obligations | Property, Plant & Equipment |
| Test subsequent cash receipts | Valuation (collectibility) | Accounts Receivable |
| Review loan agreements | Completeness, Presentation | Long-term Debt |
Evidence Reliability Rules
- External > Internal: Evidence from outside the entity is more reliable than internally generated evidence
- Direct > Indirect: Evidence obtained directly by the auditor (physical exam, recalculation) is more reliable than indirect evidence (inquiry)
- Original > Copy: Original documents are more reliable than photocopies or electronic copies
- Strong internal controls improve reliability: Internally generated evidence is more reliable when the entity has effective internal controls
- Inquiry alone is never sufficient: Inquiry must always be corroborated with other evidence
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