Management assertions

Management assertions, also referred to as financial statement assertions, are the implicit or explicit claims made by an entity's management regarding the recognition, measurement, presentation, and disclosure of the various elements of financial statements and related disclosures. These assertions form the foundation for auditors' assessments of the fair presentation of financial information, enabling the evaluation of risks of material misstatement at both the financial statement level and the assertion level.^[1] In the context of auditing standards, such as those issued by the Public Company Accounting Oversight Board (PCAOB), management assertions are categorized into five primary types to address different aspects of financial reporting. Existence or occurrence asserts that assets, liabilities, and equity interests exist at a given date, and that recorded transactions and events have actually occurred during the period. Completeness claims that all transactions and accounts that should be presented in the financial statements for the period under audit are included. Valuation or allocation pertains to the inclusion of asset, liability, equity, revenue, and expense components at appropriate amounts, subject to adequate disclosure. Rights and obligations asserts that the entity holds or controls rights to the recorded assets, and that liabilities are the obligations of the entity at a given date. Finally, presentation and disclosure ensures that the components of the financial statements are properly classified, described, and disclosed in accordance with the applicable financial reporting framework. Auditors rely on these assertions to design and perform audit procedures that gather sufficient appropriate audit evidence, corroborating or refuting management's claims to support the audit opinion on the financial statements. This process is integral to standards like AS 2110, which requires auditors to identify and assess risks of material misstatement by considering these assertions for significant accounts and disclosures.^[1] Internationally, similar frameworks under the International Standards on Auditing (ISA), such as ISA 315, expand on these with additional sub-assertions like accuracy and cut-off for classes of transactions, reflecting variations in global auditing practices while maintaining the core purpose of verifying financial integrity.^[2]

Fundamentals

Definition and Scope

Management assertions refer to the implicit or explicit representations made by a company's management that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, such as U.S. GAAP or IFRS.^[3] These assertions encompass claims regarding the recognition, measurement, presentation, and disclosure of various elements within the financial statements, including transactions, events, account balances, and related disclosures.^[3] The scope of management assertions is confined to financial reporting matters, specifically those that pertain to the components of the financial statements prepared under recognized accounting standards.^[4] This includes assertions about the existence, completeness, accuracy, and appropriate classification of financial information, but excludes non-financial assertions, such as those related to operational efficiency or environmental impacts, which fall outside the purview of financial statement audits.^[3] A key distinction exists between management assertions and the auditor's opinion: management bears the primary responsibility for preparing the financial statements and making these assertions, while auditors independently evaluate the validity of those assertions through evidence gathering to form an opinion on the overall fairness of the financial statements.^[5] Management assertions form the foundational framework for audit planning, as they help auditors identify areas of potential material misstatement that require verification.^[3]

Historical Background

The concept of management assertions in auditing emerged in the late 1970s and early 1980s as part of a broader shift from general audit objectives to a more structured, assertion-based approach that focused on verifying specific claims made by management in financial statements. This evolution was driven by the need for auditors to obtain evidential matter supporting discrete elements of financial reporting, moving away from holistic assessments of fairness. A pivotal development occurred in 1980 when the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 31, Evidential Matter, which first formally classified financial statement assertions into categories such as existence, completeness, valuation, rights and obligations, and presentation and disclosure.^[6] These categories provided a framework for auditors to design procedures that directly addressed risks of material misstatement at the assertion level, influencing subsequent refinements in U.S. auditing practices throughout the decade. The early 2000s marked a critical milestone in the formalization of management assertions, spurred by high-profile financial scandals that exposed weaknesses in audit reliability and corporate governance. The collapse of Enron in 2001 highlighted how unchecked management representations could lead to massive misstatements, prompting the U.S. Congress to enact the Sarbanes-Oxley Act (SOX) in 2002, which established the Public Company Accounting Oversight Board (PCAOB) to oversee auditing standards for public companies. In response, the PCAOB issued Auditing Standard (AS) No. 15, Audit Evidence, in 2010, which explicitly incorporated and refined the assertion framework from SAS No. 31 for audits of public entities, requiring auditors to obtain sufficient evidence to corroborate management's assertions regarding financial statements and internal controls.^[7] This standard enhanced the precision of risk assessment by linking assertions directly to audit procedures, thereby strengthening overall audit quality in the post-SOX era.^[7] Globally, the assertion-based approach continued to evolve in the 2010s, with international standards emphasizing its role in risk-based auditing. The International Auditing and Assurance Standards Board (IAASB) revised International Standard on Auditing (ISA) 315 in 2019, Identifying and Assessing the Risks of Material Misstatement, which integrated assertions more robustly into the auditor's risk assessment process, requiring evaluation at both the financial statement and assertion levels to address complex business environments.^[8] This update promoted consistency across jurisdictions by clarifying how assertions help identify significant risks, influencing adoption in various national standards.^[8] As of 2025, management assertions remain a cornerstone of auditing frameworks, with recent U.S. updates reaffirming their structure without substantive alterations. The PCAOB amended AS 1105, Audit Evidence, effective for fiscal years beginning after December 15, 2025, to modernize language and incorporate technology considerations while preserving the core assertion categories for evaluating financial statement reliability.^[9] These changes ensure the framework's continued relevance amid evolving audit methodologies.^[9]

Assertion Categories

Transaction and Event Assertions

Transaction and event assertions represent management's representations regarding the classes of transactions and events that occurred during the reporting period, focusing on their proper recognition and recording in the financial statements. These assertions are fundamental to ensuring that the financial statements accurately reflect the entity's economic activities over time, distinct from assertions about ending balances or disclosures. According to auditing standards, there are five primary transaction and event assertions: occurrence, completeness, accuracy, cutoff, and classification.^[10]^[11] The occurrence assertion states that transactions and events that have been recorded or disclosed have actually occurred and pertain to the entity. This ensures that only valid economic events are included in the financial records, preventing fictitious or unauthorized entries. For example, in the context of sales transactions, management asserts that recorded revenues correspond to actual shipments of goods to customers, supported by documentation such as shipping records.^[11]^[2] The completeness assertion affirms that all transactions and events that should have been recorded have been recorded. This addresses the risk of omissions, ensuring no material economic activities are excluded from the financial statements. In practice, for purchases, management asserts that all goods received and services rendered during the period are fully captured in the accounts payable and expense records.^[11]^[2] The accuracy assertion provides that amounts and other data relating to recorded transactions and events have been recorded appropriately. This involves correct computation and application of rates, prices, and other factors to the transactions. For instance, regarding payroll transactions, management asserts that employee compensation amounts are accurately calculated based on hours worked and applicable wage rates.^[11]^[2] The cutoff assertion confirms that transactions and events have been recorded in the correct accounting period. This prevents misstatements arising from timing errors, such as recording next-period sales in the current period. An application example is inventory purchases, where management asserts that receipts occurring just after year-end are not prematurely included in the current period's cost of goods sold.^[11]^[2] The classification assertion states that transactions and events have been recorded in the proper accounts. This ensures appropriate categorization to reflect the nature of the economic events accurately. For example, in revenue recognition, management asserts that sales of goods are classified as operating revenue rather than other income, aligning with the applicable financial reporting framework.^[11]^[2] These assertions guide auditors in identifying and assessing risks of material misstatement at the transaction level, informing the design of responsive audit procedures.^[10]

Account Balance Assertions

Account balance assertions pertain to the financial statement balances at the end of the reporting period, focusing on whether assets, liabilities, and equity interests are accurately reflected in the balance sheet as of that specific date. These assertions are critical in auditing because they address the static nature of balances, ensuring that the reported amounts represent the entity's financial position without regard to the flows of transactions during the period. Auditors evaluate these assertions to detect material misstatements that could arise from errors or fraud in recording or valuing balances.^[3] The existence assertion confirms that assets, liabilities, and equity interests reported in the financial statements actually exist at the balance sheet date. For instance, this assertion requires verification that recorded assets, such as inventory or property, are physically present and not overstated through fictitious entries. Auditors often test this by obtaining third-party confirmations, such as sending requests to customers to verify accounts receivable balances, which provides reliable external evidence that the receivables exist and are owed to the entity. Failure to validate existence could lead to inflated assets, misleading stakeholders about the company's resources.^[3] The rights and obligations assertion ensures that the entity holds or controls the rights to the reported assets and that the liabilities represent genuine obligations of the entity at the balance sheet date. This is particularly relevant for assets like leased equipment or securities, where ownership or control must be substantiated through legal documentation, and for liabilities such as contingent debts that the entity is legally bound to settle. Implications include preventing the recognition of assets to which the entity has no enforceable claim, which could distort net worth and expose the entity to disputes over title or repayment responsibilities.^[3] Under the completeness assertion, all assets, liabilities, and equity interests that should have been recorded at the balance sheet date are indeed included in the financial statements. This assertion counters the risk of understatement, such as unrecorded liabilities from pending lawsuits or omitted assets like off-balance-sheet receivables. Auditors address this by reviewing subsequent events or cutoff testing to ensure no omissions occurred, as incomplete reporting could understate obligations and overstate profitability ratios.^[3] The valuation and allocation assertion verifies that assets, liabilities, and equity interests are included at appropriate amounts and adjusted for items like depreciation, amortization, or allowances for doubtful accounts. Proper valuation ensures that balances reflect fair value or historical cost as required by the applicable financial reporting framework, with allocations for related expenses or revenues accurately assigned. For example, inventory must be valued at the lower of cost or net realizable value to avoid overstating assets; misapplication here could impair the balance sheet's reliability and affect key metrics like return on assets. Substantive testing methods, such as vouching to supporting documents, are commonly used to gather evidence for these assertions.^[3]

Presentation and Disclosure Assertions

Presentation and disclosure assertions pertain to the components of the financial statements, including how classes of transactions, account balances, and other matters are classified, described, and disclosed in the financial statements and the accompanying notes. These assertions form a critical part of management's representations in the financial reporting process, ensuring that the information presented is transparent, relevant, and compliant with applicable financial reporting frameworks. Auditors evaluate these assertions to assess the risk of material misstatement due to error or fraud in the way financial information is communicated to users.^[7]^[8] The occurrence and rights and obligations assertion in presentation and disclosure requires that disclosed events, transactions, and other matters have actually occurred and pertain to the entity. This means management asserts that the items described in the notes to the financial statements, such as related-party transactions or subsequent events, are genuine and represent the entity's own obligations or rights, rather than those of unrelated parties. For instance, disclosures about guarantees or commitments must relate directly to the reporting entity to avoid misleading users about potential liabilities. This assertion aligns with standards from the Public Company Accounting Oversight Board (PCAOB), the American Institute of CPAs (AICPA), and International Standards on Auditing (ISA), which emphasize verifying the legitimacy of disclosed information.^[7]^[8] The completeness assertion ensures that all disclosures required by the applicable financial reporting framework have been included in the financial statements. Management represents that no material information, such as risks from off-balance-sheet arrangements or uncertainties in accounting estimates, has been omitted, which could obscure the true financial position or performance of the entity. This is particularly important for notes that provide context to the primary financial statements, where incomplete disclosures might lead to users underestimating exposures like environmental liabilities. Auditing standards highlight that auditors must design procedures to detect omissions, as incomplete disclosures can result in material misstatements.^[7]^[8] Under the classification and understandability assertion, financial information must be appropriately presented, described, and classified within the financial statements and notes, with disclosures expressed clearly and concisely to enable users to comprehend their nature and impact. This involves proper aggregation or disaggregation of items—for example, separating recurring from non-recurring expenses in the income statement notes—and using terminology consistent with the reporting framework to avoid ambiguity. Management's responsibility here is to ensure that complex matters, like derivative instruments, are described in a way that is accessible without requiring specialized knowledge beyond what is typical for financial statement users. Standards from PCAOB, AICPA, and ISA stress that misclassification or unclear descriptions can impair the usefulness of financial reports.^[7]^[8] The accuracy and valuation assertion confirms that financial and other information disclosed in the statements and notes is fairly presented at appropriate amounts and on suitable bases, including consistent application of valuation methods for items like fair value measurements. Management asserts that amounts in disclosures, such as the carrying values of investments or provisions for warranties, are accurately derived and not distorted by errors in measurement or inappropriate bases. This assertion is vital for maintaining reliability, as inaccuracies in disclosed valuations could mislead stakeholders about the entity's economic reality. Auditing guidance requires auditors to test the mathematical accuracy and reasonableness of these disclosures against supporting evidence.^[7]^[8] A representative example of applying these assertions involves auditing footnote disclosures for contingencies, such as pending litigation. To address completeness, auditors review legal correspondence and obtain a confirmation letter from the entity's external attorneys to identify any unrecorded or undisclosed claims that should be revealed in the notes, ensuring all potential losses meeting recognition criteria are included. This procedure also supports occurrence by verifying that described contingencies pertain to the entity and accuracy by assessing the appropriateness of probability estimates and amounts disclosed. Such testing contributes to the overall audit evidence on presentation and disclosure.

Application in Auditing

Integration with Risk Assessment

In risk-based auditing approaches, management assertions serve as a foundational framework for identifying and assessing risks of material misstatement at both the financial statement level and the assertion level. Auditors begin by evaluating risks that could affect the financial statements as a whole, such as pervasive issues like management override of controls, before narrowing their focus to specific assertions related to classes of transactions, account balances, and disclosures. This integration ensures that audit efforts are directed toward areas with a reasonable possibility of material misstatement, as defined in relevant assertions like existence, completeness, or valuation.^[10]^[8] The process involves auditors mapping potential misstatements to particular assertions to prioritize risks and allocate resources effectively. For instance, during audit planning, inherent risk factors—such as the complexity of transactions, susceptibility to fraud or error, and changes in the business environment—are assessed for each relevant assertion. If a risk is identified at the financial statement level, it is evaluated for its impact on specific assertions; for example, an overstatement risk in accounts receivable might be linked to the existence or valuation assertion, prompting deeper scrutiny. This mapping is informed by risk assessment procedures, including inquiries of management, analytical procedures, and observation of controls, allowing auditors to determine the likelihood and magnitude of misstatements. Under standards like SAS 145, auditors document these assessments separately for inherent and control risks, setting control risk at maximum if controls are not tested, which directly influences the overall risk of material misstatement.^[10]^[12]^[13] Management assertions also play a key role in determining materiality thresholds and conducting preliminary analytical procedures tailored to specific risks. Materiality is established at the financial statement level but refined at the assertion level to focus on assertions susceptible to misstatement, ensuring that audit responses address significant risks—those with high inherent risk requiring special consideration, such as fraud. For example, in assessing fraud risk, auditors evaluate the occurrence assertion for revenue transactions by considering factors like unusual sales patterns or pressure on management to meet targets, which could indicate fictitious revenues. This assertion-level analysis enhances the precision of risk assessment, aligning audit planning with the entity's specific risks while avoiding over-auditing low-risk areas.^[10]^[12]^[8]

Testing and Evidence Gathering

Auditors design and perform substantive procedures to obtain sufficient appropriate audit evidence supporting management's assertions in the financial statements. Substantive procedures include tests of details, such as vouching transactions to supporting documents to verify occurrence, where auditors trace recorded sales back to shipping documents and customer orders to confirm that reported transactions actually took place. For existence assertions related to account balances, procedures like external confirmations are commonly used; for instance, auditors send confirmation requests to third parties to validate receivables or bank balances, ensuring the assets or liabilities exist at the reporting date. These procedures are tailored to the assessed risks at the assertion level, with the nature, timing, and extent adjusted based on the risk of material misstatement.^[14]^[15] In addition to substantive testing, auditors may perform tests of controls when relying on the entity's internal controls to mitigate risks for specific assertions, particularly completeness of transactions. For example, to address completeness, auditors test controls over the processing of revenue transactions by reperforming reconciliations of daily sales logs to the general ledger and inspecting approval procedures to ensure all billings are captured and recorded. If controls are deemed effective through such tests, the extent of substantive procedures can be reduced; otherwise, auditors expand substantive testing to achieve the necessary assurance. Tests of controls provide evidence on whether the entity's controls operate effectively to prevent or detect misstatements related to assertions like completeness in transaction recording.^[14]^[2] Sufficient appropriate audit evidence is defined by its sufficiency (the quantity needed to reduce audit risk to an acceptably low level) and appropriateness (measured by relevance to the assertion and reliability of the source). Relevance ensures the evidence directly pertains to the specific assertion, such as using vendor invoices for valuation assertions on payables, while reliability is higher for evidence from independent external sources compared to internal documents. For instance, October 2025 PCAOB staff guidance on AS 1105 provides illustrative examples for evaluating the reliability of external information provided by the company in electronic form, such as third-party data processed electronically, which is relevant when assessing evidence for assertions like existence or valuation.^[3]^[16] Auditors evaluate these criteria when selecting procedures, ensuring evidence is persuasive enough to support conclusions on assertions.^[3] Common challenges in evidence gathering include detecting cutoff errors, where transactions are recorded in the incorrect period, potentially understating or overstating revenues and expenses. To respond, auditors perform cutoff testing by examining transactions around the period-end, such as reviewing subsequent receipts for sales recorded near year-end, and incorporate subsequent events review to identify any adjustments needed for proper period allocation. These responses help ensure assertions on occurrence and completeness are adequately addressed, particularly in high-volume transaction environments.^[2]^[3]

Standards and Guidelines

PCAOB Auditing Standards

The Public Company Accounting Oversight Board (PCAOB) establishes auditing standards for audits of public companies, with management assertions serving as the foundation for obtaining sufficient appropriate audit evidence to support the auditor's opinion on financial statements and internal control over financial reporting. Auditing Standard (AS) 1105, Audit Evidence, effective for fiscal years beginning on or after December 15, 2025, defines audit evidence as information that supports and corroborates management's assertions embodied in the financial statements or internal control over financial reporting.^[9] Under AS 1105, auditors must design and perform audit procedures to obtain evidence that is relevant to the specific assertions being tested, ensuring the evidence addresses the risk of material misstatement at the relevant level.^[9] Historically, Auditing Standard No. 15 provided the framework for audit evidence supporting management's assertions in financial statements and internal controls, emphasizing the need for evidence to corroborate assertions such as existence, completeness, and valuation.^[7] This standard has been integrated into the reorganized PCAOB auditing standards, with AS 1105 incorporating and updating its core principles on assertions without changing the fundamental categories.^[9] PCAOB standards require auditors to evaluate management's assertions at the financial statement account balance and disclosure levels to identify risks of material misstatement.^[7] In integrated audits required under Section 404 of the Sarbanes-Oxley Act, auditors place particular emphasis on assertions relevant to significant accounts and disclosures, testing controls that mitigate risks for each relevant assertion to ensure reliable financial reporting.^[17] The 2025 amendments to AS 1105 include minor clarifications on the relevance of digital and electronic evidence to assertions, specifying that the reliability of such evidence depends on the company's effective information technology controls, without altering the core assertion categories.^[9]^[18]

AICPA Statements on Auditing Standards

The American Institute of Certified Public Accountants (AICPA) Statements on Auditing Standards (SAS) provide the framework for audits of non-public entities in the United States, incorporating management assertions as key elements in assessing risks of material misstatement. Management assertions represent the implicit or explicit claims made by entity management regarding the recognition, measurement, presentation, and disclosure of items in the financial statements. These assertions are evaluated at the level of classes of transactions, account balances, and disclosures to identify areas susceptible to misstatement due to error or fraud. SAS No. 145, titled Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, issued in 2021 and effective for audits of financial statements for periods ending on or after December 15, 2023, enhances the guidance on using assertions in risk assessment by requiring auditors to consider them when identifying and assessing inherent risks and control risks. Specifically, SAS No. 145 emphasizes that auditors must evaluate risks at the assertion level, focusing on factors such as complexity, subjectivity, and estimation uncertainty that could affect assertions like occurrence, completeness, and valuation.^[11] SAS No. 145 aligns closely with AU-C Section 315 of the AICPA Professional Standards, which it amends and supersedes in part, by mandating that auditors design and perform audit procedures responsive to the assessed risks of material misstatement identified through assertions. Under AU-C Section 315, as updated, auditors are required to obtain an understanding of the entity and its environment, including internal controls, to identify risks at both the financial statement level and the assertion level. This involves assessing the susceptibility of relevant assertions to misstatement and determining significant risks that demand enhanced audit attention, such as those involving fraud or complex estimates. The standard reinforces that substantive procedures must address all relevant assertions, ensuring sufficient appropriate audit evidence is gathered to support the financial statements. For instance, assertions related to account balances, like existence and rights and obligations, guide the auditor's testing of controls and substantive procedures.^[11] In contrast to the Public Company Accounting Oversight Board (PCAOB) auditing standards, which apply to public entities and integrate more prescriptive requirements under the Sarbanes-Oxley Act, the AICPA SAS offer greater flexibility for audits of smaller, non-public entities while maintaining the same core categories of management assertions—occurrence/existence, completeness, accuracy/valuation/allocation, cutoff, and classification/presentation. This flexibility allows auditors to exercise professional judgment tailored to the entity's size and complexity, such as scaling risk assessment procedures for less complex operations, whereas PCAOB standards emphasize detailed documentation and testing for internal control effectiveness in integrated audits. The AICPA approach prioritizes scalability and efficiency in private company audits, enabling auditors to adapt assertion-based risk assessments without the same level of regulatory oversight.^[19] As of 2025, the applicability of these SAS updates, including SAS No. 145, continues to reinforce the role of management assertions in substantive analytical procedures, as outlined in AU-C Section 520, by requiring auditors to consider assertion-level risks when developing expectations and evaluating results for material misstatements. This integration ensures that analytical procedures are responsive to identified risks, particularly for assertions involving valuation and allocation in estimates, enhancing audit quality for ongoing periods.^[11]

International Standards on Auditing

The International Standards on Auditing (ISAs), issued by the International Auditing and Assurance Standards Board (IAASB), provide a framework for auditors worldwide to evaluate management assertions in financial statement audits, ensuring consistency in identifying and responding to risks of material misstatement. Management assertions under ISAs represent implicit or explicit claims by management regarding the recognition, measurement, presentation, and disclosure of financial information, categorized into those related to classes of transactions and events (e.g., occurrence, completeness, accuracy, cutoff, classification), account balances (e.g., existence, rights and obligations, valuation), and presentation and disclosure (e.g., occurrence and rights/obligations, completeness, classification, understandability). These categories are harmonized with those in U.S. standards but allow adaptation to local financial reporting frameworks such as IFRS or national GAAP, promoting global interoperability while accommodating jurisdictional differences.^[8]^[20] ISA 315 (Revised 2019), effective for audits of financial statements for periods beginning on or after December 15, 2021 and ongoing in 2025, requires auditors to identify and assess risks of material misstatement at the assertion level, whether due to error or fraud, through understanding the entity and its environment. This involves evaluating inherent risk—the susceptibility of assertions to misstatement before considering controls—and control risk, considering factors such as complexity, subjectivity, change, uncertainty, and susceptibility to bias or fraud that could affect specific assertions like valuation or completeness. For instance, risks due to fraud are presumed significant at the assertion level for revenue recognition, prompting enhanced audit responses, while all assessed risks inform the design of further procedures to address potential misstatements in management assertions.^[8]^[20] Complementing this, ISA 500 establishes requirements for obtaining sufficient appropriate audit evidence to corroborate or contradict management assertions, emphasizing reliability from sources external to the entity, such as confirmations from third parties, over internal evidence. Audit evidence must be relevant to the assertions being tested and reliable in nature, with preferences for original documents, direct auditor involvement in obtaining evidence, and consistency across multiple independent sources to reduce the risk of undetected misstatements. If evidence contradicts an assertion, auditors must perform additional procedures to resolve inconsistencies, ensuring the overall audit opinion is supported by persuasive evidence.^[21]^[22] ISAs, including those addressing management assertions, have achieved widespread global adoption, with 100 jurisdictions (72% of IFAC member jurisdictions) fully adopting them for all mandatory audits as of the end of 2023, and an additional 35 jurisdictions (25%) partially adopting, covering over 120 countries in total. This broad implementation supports cross-border audits and aligns with IFRS adoption in many regions, though variations occur in application to reflect local regulatory environments. Recent developments include 2024-2025 IAASB discussions on extending assertion-based approaches to sustainability reporting, culminating in the approval of International Standard on Sustainability Assurance (ISSA) 5000 in September 2024, which enhances assurance frameworks for sustainability disclosures through principles similar to financial assertions (e.g., completeness, accuracy) but remains non-mandatory for periods before December 15, 2026.^[23]^[24]^[25]