Understanding the difference between assurance and an external audit will help you get the most out of these procedures, explains FPM Audit Manager Donal McGibbon.
Demand for assurance and audit services has increased in recent years, partly because many business grants and supports stipulate that an independent assurance report must accompany requests for assistance. Yet there is often confusion about how statutory audit differs from other forms of assurance and the impact that this has on the conclusions reached in the auditor’s report. While all audits are assurance engagements, not all assurance engagements are audits.
What is an Assurance Engagement?
The International Auditing and Assurance Standards Board (IAASB) defines assurance engagements in the International Framework for Assurance Engagements as follows:
“An engagement in which a practitioner expresses 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.”
There are five key elements in every assurance engagement:
- A three-party relationship
- An appropriate subject matter
- Suitable criteria
- Sufficient appropriate evidence
- A written assurance report.
Typical examples of assurance engagements include:
- audit of a company’s financial,
- review of the effectiveness of internal controls and IT systems,
- due diligence reporting,
- review of financial statements,
- review of grant claims.
What is an Audit?
An audit is the objective examination and evaluation of the financial statements of an organisation. The purpose is to ensure that the financial records are a true and fair representation of the transactions they claim to represent. The processes used and the examinations performed are known as “auditing”. The auditor’s conclusions are based on the evidence obtained during the audit process and are communicated in an assurance report.
Assurance vs Audit
Audit refers to the techniques and procedures used to obtain evidence. Assurance is what is obtained as a result of the audit procedures performed.
Types of Assurance Engagement
There are two main types of assurance engagements:
- Reasonable assurance engagements A financial statement audit is an example of a reasonable assurance engagement. This type of engagement reduces assurance engagement risk to an acceptably low. The engagement risk is reduced to a level that allows for a positive form of expression in the auditor’s conclusion. An example in the audit of financial statements is when the auditor’s opinion states that the financial statements give a true and fair view in accordance with the applicable financial reporting standards.
- Limited assurance engagements When an auditor is engaged to conduct a review, this is often a limited assurance engagement. In this type of engagement, auditors use a negative form of expression in their conclusion. The most common being when they state ‘nothing has come to our attention. Limited assurance engagements have a higher acceptable engagement risk, the procedures the auditor performs are ‘limited’ when compared to a reasonable assurance engagement.
Assurance and Audit Benefits
There is a wider range of benefits to be obtained from assurance engagements—for example, the output of the engagement can:
- Allow companies to comply with legislative requirements
- Increase stakeholder confidence
- Help discover issues that management/shareholders were previously unaware of
- Improve business processes
- Help obtain external finance
- Assist those charged with governance to carry out their duties in line with legislative requirements.