What is an Assurance Engagement?
In business practices, assurance engagements are meant to execute the same task that their name expresses. It is an assurance meant to generate confidence in an individual about a theory generated by a consultant or practitioner. In simple words, it is used to assure an individual about an outcome generated against a specific criterion being true.
Now, these criteria may differ based on situation and circumstances. Additionally, this framework is regarded based on International Standards for Auditing, Review Engagements, and Assurance engagements. Professional accountants practicing publicly, the committed parties in the assurance engagement or The International Auditing and Assurance Standards Board (IAASB), may use it.
The objective of an Assurance Engagement
The objective of an Assurance engagement is to provide and build confidence through the practitioner’s conclusion regarding a subject or outcome. The practitioner’s responsibility entails providing a sufficient amount of evidence that lays credibility to the assurance report containing their derived conclusion. The variation in engagements stems from how the evaluation or measurement of the subject matter is performed.
In the first case, we have the Assertion-based engagements. A responsible party is nominated to evaluate or measure the subject matter, asserting that subject matter information on the relevant intended user.
The second is direct reporting engagements, where the practitioner evaluates or measures the subject matter. This can also be obtained from a responsible party. However, this remains true as long as they did not make the generated subject matter available to the intended user. This is then made accessible to the user in the assurance report generated by the practitioner.
The Types of Assurance Engagement
The two types of Assurance Engagements differ in how their evidence gathering procedure is conducted. Their objectives as well as their assurance engagement report.
1) Reasonable Assurance Engagement
In Reasonable Assurance Engagements, the practitioner’s objective is to reduce the assurance engagement risk to a considerably low level that is acceptable and serves as a practically positive signature and gesture of the practitioner’s derived conclusion.
The evidence gathered should be part of a coherent and systematic approach that aims to; assess the risks, understand the circumstances surrounding that assurance engagement, devising appropriate measures to the risks assessed, encourage gathering more relevant evidence, and further analyze them.
2) Limited Assurance Engagement
This engagement type attempts to reduce the risk to a certain defined level, which is both acceptable and following the circumstances of that Assurance engagement. Still, only in the case where the risk itself is greater than its counterpart, the reasonable assurance engagement does. It also serves as a practically negative signature of the practitioner’s derived conclusion.
The evidence gathered following the chain of systematic evidence gathering procedure includes gaining a clear understanding of the matter to be audited and the circumstances of that assurance engagement. However, for this engagement type, the evidence-gathering procedures are rather limited compared to Reasonable Assurance engagement.
Five Core Elements of an Assurance Engagement
In a relevant practical setting, every assurance engagement needs to contain the following five elements that aim to define the parties involved and determine the extent of the engagement.
1) Existence of a Three-Party Relationship:
The first of the five elements refer to the involved parties of an assurance engagement, which includes:
- Practitioner
- A responsible Party
- Intended Users
The practitioner is the auditor responsible for providing the assurance engagement report to the intended users. An example of this could be a professional audit firm providing auditing services to its clients. The responsible party is the management that is being audited and under scrutiny by the practitioner. They are verified to ascertain whether the financial statements presented by them draw up a fair and realistic picture of the organization or not.
Lastly, the intended user shall receive the assurance engagement report by the auditors; this may include shareholders, stakeholders, or owners of the business looking to understand its technical and fundamentals.
2) Subject Matter:
Another essential element of Assurance Engagement is the subject matter. It is the information being provided by the responsible party or the management being audited to the Practitioner or Auditor. Its most common form includes financial statements, which the auditor then has to provide his conclusion for the intended user’s ultimate benefit.
There are certain criteria’s that a subject matter should fulfill. It needs to be in a form, which is measurable and identifiable, which can then be used to predict and evaluate data. Additionally, the provided information needs to have credible evidence supporting it for it to be reliable. If these criteria are failed to be met, then the subject matter is considered void and cannot be a part of the assurance engagement.
3) Suitable Criteria:
A suitable criterion provides a benchmark framework against which the practitioner must assess the provided subject matter. An example of suitable criteria to follow can be for the management to follow the IFRS (International Financial Reporting Standards) when preparing financial statements for their subject matter.
However, these criteria differ from situation to situation. These differentiations can be the distinguishing factor for multiple assurance engagements. The suitable criteria are usually based on the legal framework under which a client can operate based on their locality.
4) Sufficient Appropriate Evidence:
Sufficient appropriate evidence backing the subject matter provides credibility to the management’s reported financial statements. This also allows the practitioner to give their own opinion about them in a comprehensive manner keeping in light the provided evidence. Without this credibility, practitioners cannot provide an opinion since the information cannot be confirmed by any means.
The evidence should not be complementing the subject matter in terms of quality but also quantity. This allows the practitioner to analyze data further and report back on the assurance engagement, making it a vital component. The management is the only party that has to provide such credible evidence supporting its subject matter.
5) Assurance Report:
Lastly, the assurance report is a document provided by the practitioner to the intended user after having assessed the subject matter based on a suitable criterion provided by the management. The entailing is of this report differs based on the situation. For an auditor, this may come in the form of an audit report.
This report can express the practitioner’s opinion providing either higher assurance under the reasonable assurance engagements or a moderate assurance degree under the limited assurance engagements. Following the report, the user can then proceed to make their final decision.
Therefore, an assurance engagement is a contract assuring a practitioner about their opinion on the dealings of a company to the end-user requesting it. It is measured against a set criterion involving five crucial elements that provide the basis for any assurance engagement between the Practitioner and the Intended User.
One thing to bear in mind is that not all engagements conducted by the practitioner constitute assurance engagements. Several other engagements are performed by practitioners that are largely different from an assurance engagement. A practitioner may only accept an assurance engagement when they have relevant experience with the industry required to practice in and credible sufficient appropriate evidence to support their end conclusion.