Testing the Validity of Management Assertions

Testing the Validity of Management Assertions

The audit of the financial statements prepared by the management is necessary due to various reasons. The practice is important because there is an asymmetry of information between the agents and principals. The managers have access to crucial information which the owners might not have. Hence, they may come up with schemes aimed at defrauding the organization. The auditing process discourages the management and other employees from committing fraud. The auditing process will act as a moral check on the agents of the shareholders. The practice will verify all the transactions to detect and report any fraudulent activity which might have been committed by the management. The company’s owners will rely on the report of the auditors to deal with the managers or employees who might have been involved in fraud.

The auditing process is also essential in testing the management assertions because conflicts of interest might arise as they manage the organization. Audit tests on investments activities like purchase of assets might be carried out using wrong channels to ensure that the management benefits. The auditor has the main role of investigating investment activities to ensure that the assets were purchased at the recorded costs. Hence, the auditing process will assist in detecting any cases of conflict of interest within the organization and issuing a written report.

Auditing is also necessary for any organization because there is a need to test the strength of the internal controls. Strong internal controls are essential because they help in identifying the areas of the organization which are susceptible to fraud and other malpractices. The auditor will, in most cases test the account balances to check whether they are prone to unplanned changes. Hence, auditing is necessary to test whether the internal controls put in place by the manager are prone to malpractices.

Auditing the management assertions will assist in promoting accountability in the organization. Notably, the auditor’s reports issued after the exercise will force the management to be accountable. The practice will ensure that the managers adopt the generally accepted accounting principles in the preparation of the financial statements. Also, if the management is aware that the company will be frequently audited, they will ensure that the accounting system in the organization is dependable. Hence, the auditing process will ensure that cases of conflict of interest, fraudulent activities or weak internal controls are discouraged. The three factors show why an audit of management assertions is necessary in an organization.