The primary objective of an audit engagement is for auditors to form an opinion about the subject matter. This subject matter is usually the client’s financial statements. The auditor is responsible for ensuring that these statements are free from material misstatements. Once they do so, they can provide the client with assurance. Assurance engagements are the most common type of audit engagement for external auditors.
What is an Assurance Engagement?
An assurance engagement is a type of engagement in which a practitioner obtains sufficient appropriate audit evidence to form an opinion about the subject matter. However, there is more to assurance engagements. The International Framework for Assurance Engagements defines assurance engagements as follows.
“An engagement in which a practitioner obtains sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.”
The basic premise of an assurance engagement is to present users with confidence regarding the subject matter. Based on this assurance, users can make well-informed decisions regarding the company. For them, assurance engagements provide certainty about the risk involved with such decisions. However, assurance engagements do not provide absolute assurance.
There are two types of assurance engagements that auditors may undertake. These include reasonable and limited assurance engagements. Both of these differ from each other in several fundamental regards.
What is a Reasonable Assurance Engagement?
Reasonable assurance engagements are a type of assurance engagements in which auditors provide a high level of assurance. As mentioned, these engagements do not include absolute assurance. Therefore, reasonable assurance does not imply that the auditor covers all of the subject matter. However, they still provide a high level of assurance regarding the subject matter and material misstatements.
Reasonable assurance engagements still include some probability of material misstatements. However, compared to limited assurance engagements, the likelihood is lower. Therefore, even if auditors provide reasonable assurance, some material misstatements will be present in the subject matter. In conclusion, these assurance engagements do not guarantee the prevention and detection of all material misstatements on a timely basis.
What are the Characteristics of Reasonable Assurance Engagements?
Reasonable assurance engagements have several characteristics that differentiate them from other assurance engagements. These also define how reasonable assurance engagements work and what users can expect from them. Some of these characteristics are as below.
Assurance Level
As mentioned above, reasonable assurance engagements provide a high level of assurance. Despite that, it does not imply that the assurance level is maximum or absolute. There is still a chance that material misstatements will exist in the subject matter. However, there is only a remote chance that these misstatements will occur.
Audit Evidence
Like any other audit engagement process, auditors need to obtain sufficient appropriate audit evidence for reasonable assurance engagements. However, the sufficiency and appropriateness differ. For reasonable assurance engagement, the audit evidence needs to support the auditors’ opinion to reach reasonable conclusions. It may vary from other assurance engagements, for example, limited assurance, where auditors draw limited conclusions.
Process
With every opinion that auditors provide, they take a risk that it may not be correct. As the assurance level for reasonable assurance engagements is higher, these risks will also be high. Therefore, auditors need to perform thorough procedures to obtain sufficient appropriate evidence. The audit process will include the use of both substantive procedures and tests of controls.
Conclusion
As with other assurance engagements, auditors need to reach a conclusion about the subject matter with reasonable assurance engagements as well. However, this conclusion may differ from other assurance engagements. For reasonable assurance, auditors need to conclude that the subject matter conforms with identified suitable criteria. This conclusion should address that the conformation will be in all material respects.
Report
Auditors provide their opinion or conclusion through an audit report. Each assurance engagement differs according to the type of engagement. For reasonable assurance engagements, the report presents a positively worded assurance opinion. It differs from limited assurance engagements where the wording is negative. This positively worded assurance also enhances the assurance level for the assurance engagement.
Regulations
Compared to other assurance engagements, reasonable assurance engagements have more regulations. For that reason, auditors also need to ensure they perform thorough procedures to cover those regulations. Similarly, they will need to collect higher quality evidence and may also need higher quantity. These regulations also contribute to the higher risks associated with reasonable assurance for auditors.
Example
A primary example of a reasonable assurance engagement is external audits. External audits occur quarterly or annually for most companies. These audits illustrate all the above features. For example, with external audits, auditors have to provide a high assurance level. These audits also require auditors to provide a positively worded conclusion in the audit report.
Conclusion
Assurance engagements include obtaining sufficient appropriate audit evidence regarding the subject matter. There are two types of assurance engagements, including reasonable and limited assurance engagements. Reasonable assurance engagements have several characteristics. Usually, these include the assurance level, audit evidence, process, conclusion, report, regulations, and example.
