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Financial statement assertions are statements or claims companies make about the fundamental accuracy of the information in their financial statements, like the balance sheet, income statement, and cash flow statement. Also referred to as management assertions, these claims can be implicit or explicit.
Assertions claim that the figures reported are a truthful presentation of the company’s assets and liabilities following applicable standards.
Key Takeaways:
- Five assertions attest to the authenticity of information on balance sheets, income statements, and cash flow statements.
- Investors and analysts rely on accurate statements to evaluate a company’s stock.
- The Financial Accounting Standards Board requires publicly traded companies to prepare financial statements per GAAP.
Accounting Standards
Financial statement assertions are a company’s stamp of approval that the information in its financial statements is a true representation of its financial position. This includes any information on the balance sheet, income statement, and cash flow statement, and pertains to every asset and liability on these forms.
The Financial Accounting Standards Board (FASB) establishes accounting standards in the United States. These are regulations that companies must follow when preparing their financial statements. The FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP).
A company makes five financial statement assertions. These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.
Tip
Investors should evaluate every financial metric to evaluate a company’s stock found on financial statements. If the figures are inaccurate, the metrics such as the price-to-book ratio (P/B) or earnings per share (EPS) would be misleading.
1. Accuracy and Valuation
The assertion of accuracy and valuation means all figures presented in a financial statement are accurate and based on the proper valuation of assets, liabilities, and equity balances. This financial assertion states that the different components of a financial statement, such as assets, liabilities, revenues, and expenses, have been properly classified within the statement.
One of the ways to test this assertion is to evaluate the calculations. For example, the assertion of accurate valuation regarding inventory states that inventory is valued per the International Accounting Standards Board (IASB) IAS 2 guidelines, which require inventory to be valued at the lower of either cost or net realizable value.
2. Existence
The assertion of existence means the assets, liabilities, and shareholder equity balances appearing on a company’s financial statements exist as stated at the end of the accounting period the financial statement covers. This assertion assures that the information presented exists and is free from fraudulent activity.
The authenticity of this assertion can be tested by physically verifying all noncurrent assets and receivables. For example, any statement of inventory included in the financial statement carries the implicit claim that such inventory exists, as stated, at the end of the accounting period. The assertion of existence applies to all assets or liabilities in a financial statement.
3. Completeness
This assertion attests that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s inventory, including inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement.
The completeness included in a financial statement means that all transactions in the statement occurred during the accounting period that the statement covers and that all transactions that occurred during the stated accounting period are in the statement. Testing for completeness includes reviewing accounts and reconciliation of payables to supplier statements.
Important
During a company audit, the auditor reviews the reliability of the financial statement assertions.
4. Rights and Obligations
The assertion of rights and obligations means that all assets and liabilities in a financial statement belong to the company issuing the statement. The company confirms that it has legal authority and control of all the rights to assets and obligations to liabilities highlighted in the financial statements.
This assertion confirms the company has all usage rights to recognized assets. For liabilities, it is an assertion that all liabilities listed on a financial statement belong to the company and not a third party. To test the authenticity of this assertion, individuals can review legal documents, such as deeds and borrowing agreements for loans and other debts.
5. Presentation and Disclosure
The presentation and disclosure assertion claims that all appropriate information and disclosures are included in a company’s statements, and all the information presented in the statements is fair and easy to understand. This assertion may also be categorized as an understandability assertion.
Many professionals review and test the authenticity of this assertion by using certain checklists. This helps ensure that the financial statements comply with accounting standards and regulations.
What Is the Role of a Financial Statement Preparer?
Accounting management assertions are implicit or explicit claims made by financial statement preparers. These assertions attest that the preparers abided by the necessary regulations and accounting standards when preparing the financial statements.
Are Financial Accounting Assertions Important in Auditing?
Financial accounting assertions are a part of auditing because there is no other way to hold the preparers of financial statements accountable. By signing and attesting to the authenticity of the statements, the preparer essentially puts their stamp of approval on the paperwork.
What Information Is Included in a Company’s Financial Statements?
Companies prepare multiple financial statements. Some information for auditors, shareholders, and market analysts includes cash flow, accounts receivable, accounts payable, income, assets, liabilities, inventory, and cost of goods sold (COGS).
The Bottom Line
The Financial Accounting Standards Board requires publicly traded companies to complete financial statements. When statements are prepared, five assertions attest to the authenticity of information on balance sheets, income statements, and cash flow statements.
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