The International Framework for Assurance Engagements (The Framework) permits only two types of assurance engagement, i.e. a reasonable assurance engagement and a limited assurance engagement.
Reasonable assurance engagement
In a reasonable assurance engagement, the practitioner gathers sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria, and gives a report in the form of a positive assurance.
The term ‘sufficient appropriate’ is somewhat technical. ‘Sufficient’ refers to the quantity of evidence obtained. The evidence collected has to be enough, and how much is enough depends on the auditor’s risk profile and the circumstances of the engagement. If an auditor is aggressive, then lesser evidence would considered to be enough to provide the level of confidence from which an audit opinion is issued. Conversely, a more conservative auditor would wish to collect more evidence on which to base his/her opinion. However, in a reasonable assurance engagement, the quantity of evidence collected would not be too limited as the auditor is trying to conclude that the financial statements do in fact comply with the relevant criteria in all material respects.
‘Appropriate’ on the other hand refers to the quality of evidence obtained. It can be further broken down into two elements, i.e. relevance and reliability. An evidence collected is considered ‘appropriate’ if it is relevant to the assertion being tested and is obtained from a reliable source.
A positive assurance is given when the auditor gives a ‘direct’ opinion on the financial statements. This is illustrated as follows:
‘the financial statements have been prepared in accordance with applicable legislation and accounting standards’
The opinion above shows that the auditor is very confident about making his/her statement simply because the evidence collected and the work done have been extensive, covering all material areas of the financial statements.
Limited assurance engagement
In a limited assurance engagement, the practitioner gathers sufficient appropriate evidence to conclude that the subject matter is plausible in the circumstances, and gives a report in the form of a negative assurance.
In this case, the auditor also gathers sufficient appropriate evidence but only to confirm that the financial statements are ‘worthy of believe’ from which to issue an opinion. This means that the quantity and quality of evidence gathered would be lower as compared to those in a reasonable assurance engagement, since the objective here is not to cover all material respects of the financial statements.
The auditor then gives a negative assurance by providing an ‘indirect’ opinion on the financial statements. This is illustrated as follows:
‘nothing has come to our attention that causes us to believe that the financial statements are not prepared in accordance with applicable legislation and accounting standards’
The opinion above shows that the auditor is less confident about making his/her statement simply because the evidence collected and the work done have been limited. The auditor is essentially giving an opinion based on what he/she was able to find in the limited amount of testing and checking.
The Framework states that the level of assurance given by a reasonable assurance engagement is high, whereas a limited assurance engagement gives a moderate level of assurance. It is not possible to give an absolute level of assurance because of the following:
- The lack of precision often associated with the subject matter. The financial statements may not be 100% accurate. A small misstatement could go undetected and the financial statements can still be considered as true and fair.
- The nature, timing and extent of audit procedures. The use of tests of controls and substantive procedures may produce different results to a particular testing. Similarly, the time at which the audit was conducted and the level of detail of testing would yield different results.
- The fact that evidence is usually persuasive rather than conclusive. Most evidence collected are persuasive in nature, i.e. they are at best persuading the auditor to believe that a particular assertion has been justified.
- The fact that evidence is gathered on a test basis. In order to be cost-effective, most evidence are gathered from testing samples of items in a population rather than checking all items.
- The completeness problem. Even if the auditor tests all items in a population, there is still the risk that some items may be omitted from the population in the first place.