ACCA Advanced Audit and Assurance (AAA) Practice Exam

What do assertions in financial statements represent?

1. Explicit representations by external auditors

2. Management’s declarations that can indicate potential misstatements

3. The expectations of stakeholders regarding financial performance

4. Legal requirements for financial disclosures

The correct answer is: Management’s declarations that can indicate potential misstatements

Assertions in financial statements represent management's declarations regarding the accuracy and completeness of the information presented in those statements. These assertions are fundamental because they form the basis for an auditor's examination of the financial statements. Management is responsible for ensuring that the financial statements are free from material misstatement, whether due to fraud or error. When management makes assertions, they essentially communicate their belief that the financial statements accurately reflect the company's financial position and performance. Examples of such assertions include claims about the existence of assets, completeness of transactions, valuation of assets, rights and obligations related to transactions, and the occurrence of transactions in the correct reporting period. An auditor assesses these assertions to design appropriate audit procedures aimed at obtaining sufficient appropriate audit evidence to support the auditor's opinions. When an assertion is not adequately supported, it may indicate potential misstatements, which is critical for both auditors and users of the financial statements to consider. This context emphasizes the importance of management’s assertions in driving the audit process and ensuring reliable financial reporting.