What is assurance

What is assurance ?

It is when a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

The key elements of an assurance engagement are as follows :

Three people or groups of people involved :

 - The practitioner

 - The intended user

 - The responsible party

A subject matter

As we shall see below, the subject matter of an assurance engagement may vary considerably. However , it is likely to fall into one of three categories :

- Data

- Systems or processes

- Behaviour

Suitable criteria 

The person providing the assurance must have something by which to judge whether the information is reliable and can be trusted. So, for example , in an assurance engagement relating to financial statements , the criteria might be accounting standards. The practitioner will be able to test whether the financial statements have been put together in accordance with accounting standards , and if they have, then the practitioner can conclude that there is a degree of assurance that they are reliable .

In the context of company behavior , suitable criteria to judge whether something is reliable and can be trusted might be the corporate governance code. 

Sufficient appropriate evidence to support the assurance opinion .

The practitioner must substantiate the opinion that they draw in order that the user can have confidence that it is reliable. The practitioner must obtain evidence as to whether the criteria have been met. We will look at the collection of evidence in detail later in this workbook.

A written report in appropriate form

Lastly, it is required that assurance reports are provided to the intended users in a written form and contain certain specified information. This adds to the assurance that the user is being given, as it ensures that key information is being given and that the assurance given is clear and unequivocal.

Levels of assurance 

The definition of an assurance engagement given above is taken from the international framework for assurance engagement , which is issued by the International Federation of Accountants (IFAC), a global organization for the accountancy profession, which works with its member organizations to protect the public interest by encouraging high-quality practices around the world.

The framework identifies two types of assurance engagement :

Reasonable assurance engagement and

Limited assurance engagement 

Reasonable assurance 

A high level of assurance , which is less than absolute assurance , that engagement risk has been reduced to an acceptably low level , which then allows a conclusion to be expressed positively .

Limited assurance 

A meaningful level of assurance , that is more than inconsequential but is less than reasonable assurance , that engagement risk has been reduced to an acceptable level , which then allows a conclusion to be expressed negatively .

The reason that there are two types of assurance engagement is that the level of assurance that can be given depends on the evidence that can be obtained by the practitioners . 

The key difference between the two types of assurance engagement is therefore

The evidence obtained 

The types of opinion given

We shall look at details of obtaining evidence later in this post. The key point about evidence is that in all assurance engagements, sufficient , appropriate evidence must be obtained. We will look at what constitutes sufficient, appropriate evidence as we go through the course. What determines whether evidence is sufficient and appropriate is the level of assurance that the practitioner is trying to give , so it is tied in with the type of opinion being given, which we shall look at here. In summary, a lower level of evidence will be obtained for a limited assurance engagement .

The opinion given in an assurance engagement therefore depends on what type of engagement it is. As noted above , there are two levels of assurance expressed positively and negatively.

Say, for example , that a practitioner is seeking evidence to conclude whether the report issued by the chairman of a company in the financial statements is reasonable or not. The practitioner could seek evidence , conclude that the statement is reasonable, and state in a report something like this:

" In my opinion , the statement by the chairman regarding x is reasonable."

This is a positive statement of their conclusion that the statement is reasonable. Alternatively , they could state in a report something like this:

"In the course of my seeking evidence about the statement by the chairman , nothing has come to my attention indicating that the statement is not reasonable."

This conclusion is less certain , as it implies that matters could exist that cause the statement to be unreasonable , but that the practitioner has not uncovered any such matters. This is therefore called limited assurance. It is the conclusion that a practitioner gives when they carry out a limited assurance engagement and seek a lower level of evidence .

Why is assurance important?

Users

In the key assurance service of audit, which we looked at above, the users were the shareholders of a company, to whom the financial statements are addressed. In other cases, the users might be the board of directors of a company or a subsection of them.

Benefits of assurance 

The key benefit assurance is the independent, professional verification being given above. The importance of independence and objectivity in assurance we'll discuss later.

In addition, assurance may have subsidiary benefits.

Although an assurance report may only be addressed to one set of people, it may give additional confidence to other parties in a way that benefits the business. For example, audit reports are addressed to shareholders, but the existence of an audit report with an unmodified opinion might give the bank more confidence to lend money to that business ; in other words, it enhances the credibility of the information. 

The existence of an independent check might help prevent errors or frauds from being made and reduce the risk of management bias. In other words, the fact that an assurance service will be carried out might make people involved in preparing the subject matter more careful in its preparation and reduce the chance of errors arising. Therefore, it can be seen that an assurance service may act as a deterrent.

In addition, where problems exist within information, the existence of an assurance report draws attention to the deficiencies in that information so that users know what those deficiencies are.

Assurance is also important in more general terms. It helps to ensure that high-quality, reliable information exists, leading to effective markets that investors have faith in and trust. It adds to the reputation of organizations and even countries, so that investors are happy to invest in country X because there is a strong culture of assurance provision there.

Businesses are keen to be seen as acting responsibly and are increasingly publishing information such as emissions targets or a pledge not to employ children. There is a growing public perception that this is an important area, and stakeholders are unlikely to associate with businesses that could damage their reputation. Corporate responsibility or sustainability reports provide assurance for stakeholders that this published information is reliable and accurate. 

Why can assurance never be absolute? 

Limitations of assurance 

A key issue for accountants is that there are limitations to assurance services, and therefore there is always a risk involved that the wrong conclusion will be drawn. 

The limitations of assurance services include

The fact that testing is used means the auditors do not oversee the process of building the financial statements from start to finish.

The fact that the accounting systems on which assurance providers may place a degree of reliance also have inherent limitations 

The fact that most audit evidence is persuasive rather than conclusive 

The fact that assurance providers would not test every item in the subject matter

The fact that the client staff members may collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose.

The fact that assurance provision can be subjective and professional judgments have to be made. 

The fact that assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means.

The fact that some items in the subject matter may be estimates and are therefore uncertain. It is impossible to conclude absolutely that judgmental estimates are correct. 

The fact that the nature of the assurance report might itself be limiting, as every judgment and conclusion on the assurance provider that has been drawn can not be included in it.

The expectations gap

The problems users may experience in connection with assurance provision also arise from the limitations & restrictions inherent in assurance provision. This is often because users are not aware of the nature of the limitations on assurance provision or do not understand them and believe that the assurance provider is offering a service (such as a guarantee of correctness), which in fact they are not.

The distinction between reasonable and limited assurance may also be misunderstood by users.

Assurance providers need to close this gap as far as possible in order to maintain the value of the assurance provided for the user. This is done in a variety of ways, for example, by issuing an engagement letter spelling out the work that will be carried out and the limitations of that work & by regularly reviewing the format and content of reports issued as a result of assurance work.