What is the highest level of assurance in auditing?

This blog is written by Mr. Maaz Khan, Associate Audit and Assurance Services. Please read this blog and provide your valued comments.

Assurance and it’s levels

Assurance’ means confidence. In an assurance engagement, an ‘assurance firm’ is engaged by one party to give an opinion on a piece of information that has been prepared by another party.The opinion is an expression of assurance about the information that has been reviewed. It gives assurance to the party that hired the assurance firm that the information can be relied on. Assurance can be provided by:

Audit (This may be external audit, internal audit or a combination of the two)

Review.

A statutory audit is one form of assurance. Without assurance from the auditors, the shareholders may not accept that the information provided by the financial statements is sufficiently accurate and reliable. The statutory audit provides assurance as to the quality of the information. The provision of this assurance should add credibility to the information in the financial statements, making the information more reliable and therefore more useful to the user.

Levels of assurance:

There are different levels or degrees of assurance. Some assurances are more reliable than others. The degree of assurance that can be provided about the reliability of the financial statements of a company will depend on the amount of work performed in carrying out the assurance process and the results of that work.

The resulting assurance falls into one of two categories:

1) Reasonable Assurance – A high (but not absolute) level of assurance provided by the practitioner’s conclusion expressed in a positive form. E.g. “In our opinion the accounts are true and fair”. The objective of a statutory audit is to provide reasonable assurance.

2)Limited Assurance – A moderate level of assurance provided by the practitioner’s conclusion expressed in a negative form. E.g. “Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view”. The objective of a review engagement is often to provide limited assurance.

Assurance provided by audit

An audit provides a high, but not absolute, level of assurance that the audited information is free from any material misstatement. This is often referred to as reasonable assurance. The reason why auditor is not expected to provide absolute assurance is that there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

Assurance provided by review

A review is a ‘voluntary’ investigation. In contrast to ‘reasonable’ level of assurance provided by an audit, a review into an aspect of the financial statements would provide only a moderate level of assurance that the information under review is free of material misstatement. The resulting opinion is usually (although not always) expressed in the form of negative assurance.

Negative assurance is an opinion that nothing is obviously wrong: in other words, ‘nothing has come to our attention to suggest that the information is misstated’.

A review does not provide the same amount of assurance as an audit. An external audit provides positive assurance that, in the opinion of the auditors, the financial statements do present fairly the financial position and performance of the company.

Comparison of audit and review

The higher level of assurance(audit) will enhance the credibility provided by the assurance process, but the audit work is likely to be more time-consuming than a review and so more costly than a review.

Negative assurance(review) is necessary in situations where the accountant/auditor cannot obtain sufficient evidence to provide positive assurance. For example the management of a client entity may ask the audit firm to carry out a review of a cash flow forecast. A forecast relates to the future and is based on many assumptions, and an auditor therefore cannot provide positive assurance that the forecast is accurate. However he may be able to provide negative assurance that there is nothing he is aware of to suggest that the forecast contains material errors.

Maaz Khan

There are three basic types of assurance engagement for year-end financial statements: the Notice to Reader (NTR), the Review, and the Audit, each of which vary in terms of cost, thoroughness, and level of assurance. So for what sort of engagement should you ask your Toronto audit firm?

To help you understand the three levels of year end engagements, we have outlined them in detail, below, and how they can benefit your Toronto business.

Is the Assurance Only for the Owner and the CRA? An NTR Will Suffice.

An NTR (sometimes referred to as a compilation) is the most basic level of assurance. In an NTR, the accountant simply compiles the statements and records that the business already has on-hand, without offering any investigation as to their accuracy, or opinions as to their feasibility.

The NTR is typically the most inexpensive of the three engagement types, and is commonly used for internal purposes, such as end-of-period compilations or to assist with filing taxes.

Since the NTR doesn’t offer any assurance as to the veracity or feasibility of the records, they are typically not sufficient for banks or other creditors, and they offer no assessment of potential fraud risks, nor do they offer protection from inaccurate information or actual fraud.

Is the Assurance Required by a Bank, or as Part of a CRA Audit? Then You Likely Need at Least a Review.

The Review is the ‘middle option’, offering more assurance than an NTR, and generally at less expense than a full audit. In a Review, the accountant does not provide an opinion on the financial statements, but instead uses financial data analysis and discussions with business leadership to express that everything looks to be in order.

The assurance offered by a review is often sufficient to meet the requirements of banks and creditors, as the review will verify that the records meet accounting standards, and that there does not appear to be any misrepresentation of the figures.

However, while the Review will often be able to identify major discrepancies in the figures reported, it does not confirm the accuracy of these figures, nor does it assess vulnerabilities to fraud or check the efficiency of internal controls or procedures.

Is the Assurance Required for Obtaining Funding, to Prove Compliance in a Highly Regulated Industry, or Requested by an Absentee Shareholder? A Full Audit from a Toronto Firm is Likely Necessary.

A full Audit is the most thorough engagement, providing the highest level of assurance possible. An Audit will take an in-depth look at a number of factors, including an assessment of the organization itself, its control systems, confirming costs and balances with third parties, and even performing physical inventory counts.

A full audit is typically the most expensive assurance engagement, as it offers the greatest level of assurance. As such, it’s most often only requested in instances where a business is subject to intense scrutiny, such as by a governing body or a potential investor or lender.

However, in addition to meeting assurance requirements for third parties, full audits can also be extremely useful for internal purposes. The insights obtained through this thorough assessment of your organization’s internal workings can both inform you of inefficiencies in internal procedures and controls and assess the security and oversight of your finances to identify any fraud risks.

Each level of assurance engagement is well-tailored to match very specific conditions. For a complimentary consultation with a leading Toronto audit firm, contact the team at Fuller Landau LLP, today.

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