Businesses often use financial information to communicate with owners, investors, lenders, regulators, and other stakeholders. Because different types of professional engagements can be performed on this information, it is useful to understand what assurance and audit work actually involve.
For Singapore businesses, Audit Services represent one specific type of assurance engagement focused primarily on financial statements. Assurance is a broader concept that can cover different types of information and varying levels of professional evaluation, depending on the engagement.
What Is Assurance?
Assurance refers to professional engagements designed to increase the confidence of intended users in information that has been evaluated against suitable criteria.
The information being assessed can relate to financial or non-financial matters. Depending on the engagement, assurance may involve examining, reviewing, or evaluating information and processes.
The purpose is generally to provide users with a conclusion that adds credibility to the information being considered.
What Is an Audit?
An audit is a specific type of assurance engagement. In a financial statement audit, an independent auditor obtains evidence and evaluates whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Auditors perform procedures based on assessed risks and professional judgment. The work may involve examining transactions, account balances, internal controls, supporting documents, and other relevant evidence.
Assurance Is Broader Than Auditing
The relationship between the two concepts can be understood simply:
- Assurance is the broader category of professional engagements.
- An audit is one particular form of assurance.
- Other assurance engagements may address different information or provide a different level of assurance.
This distinction is important because not every assurance engagement is an audit of financial statements.
Understanding the Purpose of an Audit
A financial statement audit provides an independent opinion intended to increase users’ confidence in the financial statements.
The auditor does not prepare the financial statements on behalf of management. Instead, management remains responsible for preparing and presenting the financial statements and maintaining appropriate records and controls.
The auditor’s role is to obtain sufficient appropriate evidence and form an independent conclusion.
Different Levels of Assurance
Assurance engagements can provide different levels of confidence depending on their nature.
Reasonable Assurance
A financial statement audit is generally designed to provide reasonable assurance. This is a high, but not absolute, level of assurance.
Auditors use risk assessment and detailed procedures to reduce audit risk to an acceptably low level. However, an audit does not guarantee that every error or instance of fraud will be detected.
Limited Assurance
Some review-type engagements provide limited assurance. The procedures are generally less extensive than those performed during an audit.
The resulting conclusion provides a lower level of assurance than a financial statement audit, based on the nature and extent of procedures performed.
Differences in Audit and Assurance Procedures
The procedures performed depend on the specific engagement.
An audit may involve:
- Detailed testing of transactions
- Examination of account balances
- External confirmations
- Evaluation of internal controls
- Analytical procedures
- Inspection of supporting documentation
- Assessment of accounting estimates
Other assurance engagements may use different procedures based on the information being evaluated and the objective of the engagement.
The Importance of Independence
Independence is an important consideration in assurance work. Users need confidence that the professional performing the engagement can evaluate the relevant information objectively.
For audits, independence requirements are particularly important because the auditor provides an independent opinion on financial statements.
Potential conflicts of interest and other threats to independence therefore need to be considered and addressed in accordance with applicable professional requirements.
Who Uses Assurance and Audit Reports?
The users of an engagement’s report depend on its purpose.
Financial statement audit reports may be relevant to shareholders, directors, lenders, regulators, and other parties who rely on the company’s financial statements.
Other assurance reports may be prepared for a more specific group of users with particular information needs.
Why the Distinction Matters to Businesses
Understanding the difference between assurance and audit can help businesses select an engagement that matches their reporting needs.
A company seeking an independent opinion on its financial statements may require an audit. Another organization may need an assurance engagement concerning a specific process, information set, or reporting requirement.
The appropriate engagement depends on the purpose, users, criteria, and level of assurance required.
Management’s Responsibilities Remain Important
An assurance or audit engagement does not transfer management’s responsibility for business records and financial information.
Management is generally responsible for maintaining appropriate accounting records, preparing relevant information, establishing suitable controls, and making necessary judgments about the business.
Auditors and other assurance professionals evaluate information within the scope of their engagement rather than taking over these responsibilities.
Audit and Assurance in a Changing Business Environment
Technology has expanded the types of information businesses produce and the methods professionals can use to evaluate it.
Digital accounting systems, automated controls, data analytics, and electronic records can influence how assurance and audit engagements are planned and performed.
However, the underlying objective remains the same: obtaining appropriate evidence and providing a conclusion that is suitable for the engagement’s purpose.
Key Takeaways
The main differences can be summarized as follows:
- Assurance is a broad category of professional engagements.
- An audit is a specific type of assurance engagement.
- Financial statement audits generally provide reasonable assurance.
- Other assurance engagements may address different information or objectives.
- The procedures performed depend on the nature and purpose of the engagement.
- Management remains responsible for the information and records being evaluated.
Conclusion
Assurance and audit services are closely related, but they are not interchangeable terms. Assurance covers a wider range of professional engagements, while an audit is a defined form of assurance focused on obtaining evidence and providing an independent conclusion about financial statements.
For businesses, understanding this distinction can make it easier to identify the type of engagement that corresponds with their reporting objectives. The scope, procedures, level of assurance, and intended users should all be considered when determining which type of professional engagement is appropriate.
