What is an Assurance Engagement?
An assurance engagement is a type of assignment that professional practitioners undertake. It involves the expression of an opinion by the practitioner regarding a provided subject matter. Practitioners use suitable criteria to evaluate the subject matter. During this process, they collect sufficient and appropriate evidence. Once they have done so, they provide an opinion regarding their findings.
Assurance engagements may come in many forms. The most common type of assurance engagement is an external audit assignment. During this process, the practitioner is a professional auditor associated with an accounting body. The auditor assesses a client’s financial statements, which constitutes the subject matter for this engagement.
Before the engagement, auditors establish suitable criteria against which they can check the subject matter. For the external audit’s purpose, the conditions come in the form of a financial reporting framework. This framework may either come from international standards or local jurisdictions. During this process, auditors collect information that they believe will constitute sufficient and appropriate audit evidence.
The sufficiency of audit evidence depends on its quantity. Usually, the more evidence that auditors gather, the better it is. However, this evidence must also be of quality, which constitutes its appropriateness. External auditors need to establish the quality and quantity for each item in the financial statements. This level may depend on certain factors, such as the risks involved, the assertions tested, the assurance level, etc.
Subsequently, when the auditors gather all the necessary audit evidence, they can establish their opinion of the financial statements. For external audits, it includes providing an opinion about the truthfulness and fairness of the financial statements. Similarly, it includes establishing whether the financial statements are free from any material misstatements.
What Are the Objectives of an Assurance Engagement?
The objectives of an assurance engagement differ according to the type of engagement. However, there are some common objectives that apply to most assurance engagements. Some of these are as below.
Expressing an Opinion
For most assurance engagements, the primary objective is to express an opinion. As mentioned, a practitioner evaluates the subject matter to establish their views. They do so against suitable criteria and gather sufficient appropriate audit evidence. By doing so, they can provide their opinion about the given subject matter.
The opinion also comes in the form of a written assurance report. This report serves as an official statement from the practitioner. It mentions the opinion that the practitioner has reached during the course of their work. Similarly, it includes the basis for expressing such an opinion. Depending on the type of engagement, this report may provide reasonable or limited assurance.
Providing Assurance
Another objective of an assurance engagement is to give assurance related to the subject matter. Usually, practitioners provide this assurance to the users defined in the three-party relationship for each assurance engagement. These involve reasonable and limited assurance. Both of these differ in various material aspects.
With reasonable assurance, the practitioner gathers sufficient appropriate evidence to draw reasonable conclusions. These engagements conclude that, in all material respects, the subject matter conforms with the identified suitable criteria. Similarly, reasonable assurance provides a positively worded assurance opinion in the written report. Overall, reasonable assurance gives users a high level of confidence.
With limited assurance engagement, the practitioner typically gathers sufficient and appropriate evidence in order to draw limited conclusions. It concludes that in the given circumstances, the subject matter is plausible according to the suitable criteria. However, it provides a negatively worded opinion. Compared to reasonable assurance, limited assurance provides a moderate or lower level of assurance.
Enhancing Confidence
By providing assurance to the intended users, assurance engagements enhance their confidence in the subject matter and responsible party. As mentioned, this confidence will be higher for reasonable assurance engagements than limited assurance. Similarly, there are other factors that contribute to how the assurance enhances the intended users’ trust.
These users usually come in the form of stakeholders that base their decisions on the provided opinion. If they receive a positive opinion, it will instill their confidence in the provided subject matter. In most cases, the subject matter is the financial statements of a company or business. However, a negative opinion can also have an adverse effect.
Reducing Engagement Risk
While all of the above objectives relate to other parties, reducing engagement risk is one of the objectives of an assurance engagement for practitioners. By gathering sufficient appropriate audit evidence, practitioners can lower this risk to an acceptably low level. Regardless of the type of assurance they provide, this objective will be the same.
As mentioned, in reasonable assurance engagements, the objective is to reduce the engagement risk to a level that the practitioner can present in a positive form. For limited assurance engagements, the aim is to express an opinion in a negative manner.
Conclusion
An assurance engagement involves practitioners presenting an opinion regarding a subject matter against suitable criteria. Each assurance engagement will have a different objective. Usually, these include expressing an opinion, providing assurance, enhancing confidence, and reducing engagement risk.
