Illustration to understand use of insertion

Let us elaborate this with the help of two illustrations. We must clearly understand that each item contained in financial statements asserts something to the readers of the accounts to indicate the ownership, existence, quantity of various things, etc. Auditing is concerned with the testing of the authenticity of the information thus conveyed.

Illustration 1 - Example 1: When we find in the balance sheet, an item under current assets reading as “cash in hand - ` 8,000” the obvious assertions that would strike the mind are the following:

• The firm concerned had ` 8,000 in hand in valid notes and coins on the balance sheet day;
• That the cash was free and available for expenditure to the firm; and
• That the book of account show a cash balance of identical amount at the end of the day on which the balance sheet is drawn up.

Example 2:

The assertions are as follows:

• the firm owns the plant and machinery;
• the historical cost of plant and machinery is ` 2lacs;
• the plant and machinery physically exists;
• the asset is being utilised in the business of the company productively;
• totalchargeofdepreciationonthisassetis`83,000todateonwhich`13,000 relates to the year in respect of which the accounts are drawn up; and
• the amount of depreciation has been calculated on recognised basis and the calculation is correct.

From the above two illustrations we know the sort of assertions that are implied in the financial statements. Incidentally, the assertions are generally implied and not specifically spelt out, though some explicit assertions are also found in the financial statements. Explicit assertions are made when otherwise the reader will be left with an incomplete picture; it may even be misleading.

An example of the former category may be found in the following items appearing in the liability side of the balance sheet:

Secured Loans ` 4,00,000

The description does not give us a complete picture. We do not know:

• the name of the lender, if it isrelevant;
• the nature of security provided;and
• the rate at which interest inpayable.

A specific mention is required about these things for a proper appreciation of the item and the financial position. Negative assertions are also encountered in the financial statements and the same may be expressed or implied. For example, if it  is stated that there is no contingent liability it would be an expressed negative assertion; on the other hand, if in the balance sheet there is no item as “building”, it would be an implied negative assertion that the entity did not own any building on the balance sheetdate.

Every financial statement contains an overall representation in addition to the specific assertions so far discussed. Each financial statement purports to present something as a whole in addition to its component details. For example, an income statement purports to present “the results of operations” a balance sheet purports to present “financial position”. The auditor’s opinion is typically directed to these