At times it may seem like Assurance and Audit are terms used interchangeably in business but the truth is that they are separate services that may sometime be merged and, in some cases, you may be needing only auditing vs assurance (or vice versa) and not even know it.
To help you make a more informed decision we have penned down this article to facilitate understanding of the key differences between Auditing and Assurance services. Let’s kick off with the meaning of the terms followed by the variations among them.
Audit: What is it?
When an entity’s financial accounts are subjected to inspection by a third party not involved in their production, the financial information is said to have been audited.
The auditor begins by gaining an understanding of the entity and the internal controls system the management has in place. Then they carry out a thorough investigation of the financial position and performance of the company by cross-checking and corroborating evidence that supports the assumptions and figures presented by the caretakers of the concern.
Assurance: What does it mean?
In the simplest words, an assurance is a positive expression of opinion meant to give confidence towards a claim.
So, in a commerce setting, what logically follows an audit is an assurance that financial statements are free from substantial error and deception. But an assurance is not always linked to an audit of the company’s financials.
It could be needed for a review that the internal controls or any of the other systems (IT, payroll) are operating effectively. A grantor may require an assurance that grant terms are being complied with.
To make matters clearer in the auditing vs assurance discourse consider the 8 major differences that set them both apart and you’ll have a better understanding of the two distinct concepts.
Through the steps of an audit, the accounting facts and figures in the financial statements are scrutinized for any misstatement, whether intentional or due to fault in recording. An audit drills down to the minutia like sales and expense and verifies their authenticity by checking bills and invoices.
Essentially audit work is like a second set of eyes on the past transactions that made up the accounting records.
Assurance works by verifying the effectiveness of systems and procedures in place used to arrive at the facts and figures, both financial and non-financial as would be the case of review of grant terms or an IT system review.
In most cases it is less a case of auditing vs assurance and more audit AND assurance as external audits (the kind that comes up most frequently) has an audit activity with a positive assurance provided to the stakeholders of the organization.
The purpose of an audit is concerned with ensuring that the financial statements and position provide an accurate and unbiased view of the affairs of the company, devoid of material mistakes and frauds. An inspection of the information provided by management that confirms its correctness and fairness.
An assurance, however, aims to provide a third party, other then the stewards of the business, the confidence that the report and findings have no material issues that could render them unreliable like misrepresentations, significant irregularities or other causes for alarm.
Level of Access
In auditing, vs assurance, auditors have unrestricted access to all sources of accounting data that go into making the books of accounts. Management is bound to facilitate the auditor in all enquiries they make as the auditor could otherwise refuse to issue an opinion in case of refusal or non-cooperation.
The scope of an assurance engagement may be limited though and management has the capacity to negotiate which information will be provided and which can be withheld, sometimes even on the pretext that the same has been reviewed during an audit activity!
There are a standard set of principles that guide the audit process, known as the ISA’s. These are globally acknowledged and adopted by auditors everywhere (external independent auditors or companies’ internal audit department) in the conduct of their inspection. Failure to adhere to these in performance of their duties can cost the auditor professionally.
But the terms of an assurance assignment are negotiated between the stewards of the business and the party requiring the assurance and may not be as rigid as the ISA’s.
However, the terms may as well be strict and encompass both ISA’s and additional examination at the request of the other party. In either case, auditor (and management) would be bound to carry out the engagement as required in order to be compliant
Quantum of Work & Cost
In an audit engagement, there is a lot more work load for the auditor as they have to verify, to a substantial degree, that the accounting data has been prepared with the true and fair principles of accounting. Accordingly, an audit incurs more hours of work and thus higher costs.
On the flip side, assurance is an analysis of the operations and systems to validate the correctness and reliability of the figures and representations of management. In some cases, like in an audit and assurance assignment, the cost may be equivalent to that of audit.
But where there is a limited scope review, like an assurance required by a lender on the audit conclusion on the statement of cash flows, the resources required are less bringing down the cost of an assurance assignment considerably.
Ambit of Responsibility
The internal audit department may be responsible for an audit activity or the company may hire an independent firm to carry out the audit. Both are acceptable to achieve the purpose of an audit.
For a meaningful assurance engagement, the professional carrying out the task must be independent of the management and thus only an external firm can carry out the assurance assignment.
Audit may be for bolstering management’s own confidence in their financial reporting system or it may be for the use of the wide variety of stakeholders of the company that use these results to make financial decisions.
The assurance engagement has to have three parties involved; the management that prepared the information, the party that requested the assurance review and an independent third party of professionals to carry out the assignment. There need not be a wide group of audience for such an engagement.
Application of Audit vs Assurance
The main use of audit engagement is seen during the annual audits of organizations where every available data is inspected to a material extent to verify trueness and correctness of the financial reports. An assurance is also provided on this annual audit in the form of a positive assurance that they are materially free from fraud and mistakes and they are then used by a variety of stakeholder for decision making.
Audits are also carried out internally by an organization with the same scope as an external audit but intended only for management.
Assurance engagements, when not in conjunction with an audit, provide a lower level of confidence with the opinion expressed in the form of a negative conclusion i.e., nothing has to come to our attention to indicate that facts and figures are not true and fair.
These are used by lenders or grantors for contract terms compliance or ability to comply reviews; due diligence reviews by prospective buyers and investors, etc.
Whether you’re in the market for auditing vs assurance services or review engagement needing assurance as opposed to audits, after going through this article you’ll be better equipped to handle negotiations with professional firms and concerned stakeholders in hashing out the way forward for your business.