Types of Assurance Engagement: All You Need to Know

What are Assurance Services?

Assurance services involve the independent examination of a subject matter by a practitioner. These professionals usually establish suitable criteria against which they can examine the given subject matter. In most cases, it may include analyzing a business or company’s financial statements or its processes. The primary purpose of doing so is to instill confidence in the given subject matter.

One example of an assurance service is an external audit. In these services, external auditors examine a company’s financial statements. They establish a financial reporting framework, which they use as the criteria against which they can analyze the financial statements. Usually, this process also involves collecting sufficient appropriate evidence.

The outcome of these services is providing an opinion from the practitioner in the form of a written report. This report mentions how the practitioner reached the given opinion. It also includes other aspects, such as defining the suitable criteria or collecting sufficient appropriate evidence. Practitioners can provide either reasonable or limited assurance through these reports.

What Are the Types of Assurance Engagements?

There are several categories used to classify assurance engagements. Based on the assurance level that practitioners provide during the assignment, there are two types of assurance engagements. These include reasonable and limited assurance engagements. Each of them differs from the other in various material aspects.

Reasonable Assurance

Reasonable assurance engagements are a type of assurance engagement in which the practitioner provides reasonable assurance. In these engagements, the practitioner gathers evidence that is sufficient and appropriate to draw reasonable conclusions. Once they do so, they conclude that the subject matter conforms in all material respects with identified suitable criteria.

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Like all other assurance engagements, reasonable assurance engagements also involve a written report. This report mentions the practitioner’s opinion of the subject matter, as stated above. For reasonable assurance engagements, this report is positively worded. It concludes that the subject matter conforms in all material respects with identified suitable criteria.

However, for any practitioner, the risks involved in reasonable assurance engagements are higher compared to others. Therefore, they must compensate for the higher risks by performing thorough procedures. As mentioned, the purpose for doing so is to obtain sufficient appropriate evidence. These may include the use of both substantive procedures and tests of controls by the practitioner.

Generally, reasonable assurance engagements are more time-consuming and stricter. The primary reason behind it is that these engagements aim to provide more confidence. Therefore, practitioners may have to abide by more regulations related to these assignments. Similarly, the work that they put into these engagements is significantly more thorough.

It implies that the auditors will have to collect more evidence when it comes to reasonable assurance engagements. Therefore, the level of both the sufficiency and appropriateness of the audit evidence collected will be high.

Limited Assurance

Limited assurance engagements are similar to reasonable assurance engagements. In these engagements, the practitioner collects sufficient appropriate evidence to draw limited conclusions. These conclusions are not subject to the same level of regulations as reasonable assurance engagements. It is different from reasonable assurance engagements where they draw reasonable conclusions.

As with reasonable assurance engagements, the outcome is the provision of a written report. However, this report varies from one provided under reasonable assurance engagements. Firstly, it differs in the wording used by the practitioner. Unlike reasonable assurance engagement reports, limited assurance engagement reports are negatively worded. Similarly, it concludes that the subject matter is plausible with the identified suitable criteria under the given circumstances.

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Unlike reasonable assurance engagements, limited assurance engagements provide a low or material level of assurance. It also implies that the risk for the practitioner will be lower. Therefore, they perform fewer procedures and do not involve substantive procedures or tests of controls. Instead, they may use analytical procedures or make inquiries.

 What Are Some Examples of Assurance Engagements?

There are two primary examples of assurance engagements. These include external audits and review engagements. Both of these differ from each other due to the level of assurance that auditors or practitioners provide.

External Audits

External audits are mandatory in most jurisdictions. These assurance engagements involve establishing how a client’s financial management complies with an established financial reporting framework. It includes the auditor examining these financial statements, usually prepared by the board of directors. Based on their work, the auditors then provide reasonable assurance about these statements.

Review Engagements

Review engagements are similar to external audits. However, these engagements do not have the same level of compliance. Instead, auditors review a client’s financial statements for a specific purpose. In this type of assurance engagement, auditors perform less work and gather limited evidence. Once they have finished these engagements, auditors provide limited assurance.

Conclusion

Assurance services involve practitioners examining a subject matter and establishing an opinion about it. There are two types of assurance engagements, which include reasonable and limited assurance engagements. Both of these differ from each other in the aspects mentioned above. There are many examples of assurance engagements, including external audits and review engagements.

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