Types of Assurance Engagement (Under Auditing Standard) You Need to Know

Did you know that there are two different types of assurance engagements? According to how much assurance the practitioners are giving, the two types of assurance engagements are reasonable and limited assurance engagements.

We will discuss the two types of assurance engagements below.

1) Reasonable assurance engagements

Reasonable assurance engagements are where the practitioners give reasonable assurance. Based on the identified suitable criteria, the practitioner will collect sufficient appropriate evidence. Based on the evidence, they will issue an opinion to decide if the subject matter is following the suitable criteria.

As this type of engagement requires reasonable assurance, the associated risks are higher. Therefore, the practitioner will perform more detailed work to gain sufficient appropriate evidence to reduce the risks. The work performed will typically include tests of controls and substantive procedures.

Since more work is required, it will usually take more time and have more rules to follow. The practitioner may also be bound by specific rules and regulations stricter than any other type of assurance engagement.

After all, evidence-gathering activities are done, and the practitioner is satisfied with the evidence they have, the next step will be to prepare the final report. The final report will be issued in writing.

In this report, the practitioner will state their opinion on whether the evidence collected supports the entity’s compliance with the subject matter. The statement will be positively worded since this is a reasonable assurance.

Here is an example of how a positively worded opinion looks like:

“In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Company as at 30 June 20X0, and of its financial performance and its cash flows for the year then ended following the International Financial Reporting Standards (and the Companies Act in Country X).”

See also  What is a Statutory Audit? (Definition, Purpose, and How Statutory Audits Work)

2) Statutory audit

The most common example of a reasonable assurance engagement is a statutory audit. Statutory audits are compulsory for companies in most countries to comply with relevant laws and regulations and the financial reporting framework.

In a statutory audit engagement, an auditor will be engaged by the entity to review its financial statements. The entity’s management prepares the financial statements. The auditors will review what they prepared and give reasonable assurance on them if everything complies with the applicable laws, regulations, and financial reporting framework.

3) Limited assurance engagements

Similar to reasonable assurance engagements, limited assurance engagements will have the practitioner gather sufficient evidence to give a narrow assurance opinion.

Since the level of assurance required is lower, the associated risks for the practitioners will also be lower. As a result, they will not need to perform as much work as in a reasonable assurance engagement.

In many cases, no test of controls or substantive procedures will be required. The practitioner may rely heavily on inquiries and analytical procedures to obtain the evidence required to issue a limited assurance opinion.

Once all work is done, the practitioner will prepare a final written report, just like in reasonable assurance engagements. However, the wording used will be slightly different. Unlike reasonable assurance engagements, the opinion will be negatively worded.

It gives the users the idea that, under the given circumstances, the subject matter is “plausible” with the identified suitable criteria.

Here is an example of how a negatively worded opinion looks like:

“Nothing has come to our attention that causes us to believe that the accompanying financial statements of the Company as of 30 June 20X0 are not prepared, in all material respects, in accordance with  the International Financial Reporting Standards (and the Companies Act in Country X).”

See also  Why Audit is Important? What Are They?

4) Review engagements

A review engagement is the most common type of limited assurance engagement. This is usually performed when an external party like a  bank requires a review of its financial statements before granting them a loan.

Similar in many aspects, review engagements can be said to be a lite version of statutory audits. They differ in the amount of work required and the final assurance given.

After reviewing the financial statements, the practitioner will issue a negatively worded opinion on whether the practitioner has noted anything that may cause them to believe the financial statements are not prepared per the relevant financial reporting framework.

Beware of the expectations gap

There is a misconception that an audit will give the users absolute assurance. Well, that is incorrect. There is no way the practitioner can confirm that the financial statements are 100% correct. This difference in expectations is what we call the expectations gap.

The gap exists due to the beliefs that:

  • Auditors are the ones in charge of the preparation of the financial statements. This is actually the management’s responsibility.
  • Auditors’ main duty is to look for fraud, but this is not true. Auditors will only decide if the financial statements are true and fair, i.e., free from material misstatement, which may or may not be due to fraud;
  • Auditors test every balance and transaction. Again, this is not true. Auditors only perform work on a sampling basis.

Always remember, the highest level of assurance that practitioners can give is only reasonable. There is no way that an absolute assurance can be given as there are limitations such as:

  • Evidence gathered by the practitioner is usually persuasive instead of conclusive.
  • Work performed is on a sampling basis.
  • Reliance on management’s representations as evidence for certain areas.
  • Inherent risks associated with the controls that are used as audit evidence.
  • Judgements used in the preparation of the financial statements.
See also  Auditing Cost of Goods Sold - Risks, Assertions, and Procedures

Summary

We have introduced two types of assurance engagements above. They are reasonable assurance engagements and limited assurance engagements. They differ in many aspects, from work required to the opinion issued in the final report. Statutory audit engagements are reasonable assurance engagements, while review engagements are limited assurance engagements.

Scroll to Top