When evaluating the company’s financial record, we need professional practices to determine almost-accurate results. This detailed analysis is done to check a company’s financial performance and detect any errors from the history.
For finance enthusiasts, the term audit and assurance instantly comes to mind when we think about evaluation.
Most people rank audit and assurance as the same. This couldn’t be further from the reality. Today, we are here to talk about the everlasting debate of auditing vs. assurance and what to expect from each.
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.
So, sit back with your favorite coffee and prepare for a journey of clarity and concept. Next, we know that you are making a point in your next debate.
Elaborating the Difference Between Audit and Assurance
Before a detailed comparison, let’s take a dive into both concepts to see what services a general client gets from 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.
Details of Auditing Services
An audit service is conducted to regulate and detect abnormalities in a company’s financial records. It is a detailed practice to judge the accuracy of a client’s financial report. Apart from accuracy, the audit also focuses on authenticity and whether the statements follow accounting standards and are presented fairly. Keep in mind all the ethical concerns for reporting financial statements.
It is a detailed process that identifies any concerning factors such as false entries, double entries, material misstatements, false representation, or fraudulent activities.
Previously, we talked about internal audits and their impact on a company. These protocols are included to ensure that an organization runs smoothly and that any kind of human/logical error is detected and eliminated at the right time. These controls make it much easier for a third-party audit to work. (Hold tight. We will talk about them in the coming articles).
It is essential to perform internal and external audits regularly to keep your company in line with the regulations presented by the financial reporting standards – GAAP and IFRS. Do you know IFRS plans to unite the financial reporting standards of the entire world? Currently established in 90 countries, it will make it easier to compare, present, and understand statements. Also, you get to work and trade with a lot of countries. Neat right?
Returning to the topic, audit services are performed by people with a degree in accounting and finance majors. Internal auditors work full-time with your company, while the external auditor is a third-party person with no interest or personal interest in their client.
Details of Assurance Services
Let’s talk about assurance now. It is a slightly different process. Assurance services are provided by professionals who assess your records and give information and guidance. Unlike auditors, their job is to detect how many errors you make and form an opinion in the end.
Assurance is provided by a third-party professional who has no personal affiliation with your company. Their main aim is to improve the overall performance of your statements to make better decisions.
Assurance experts ensure that the documents are carefully reviewed and do not contain any information that might damage the integrity of your organization. Plus, it helps auditors to derive results much quicker.
One Third Party Information Provider + One Third Party Evaluator = Better Financial Record
This is why audit and assurance go hand-in-hand.
Assurance does not request the company to correct their mistakes, nor are they required by law to publish an opinion. It basically revolves around five main things:
- A three-party relationship involves a practitioner, a responsible party, and intended users. A practitioner is a person hired to perform assurance. The responsible party is the group that has to provide you with records. Lastly, the intended users are stakeholders directly interested in the report.
- A relevant subject matter is essential. It means you need to have the reports available for assurance.
- Appropriate criteria mean that an assurance expert needs to have a set of laws and rules to judge the records against. Governing bodies typically set these rules.
- Sufficient evidence to back that the reports are made from authentic information.
- A final opinion where your assurance expert states his observation and evaluation.
Assurance reduces the risk of any fraud or potential damage around the company. It can be applied to various areas of the industry.
Differences Between Audit and Assurance
Now that we are clear about both services, let’s discuss and compare the key differences between both.
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.
An audit is monitoring your financial statements and detecting any errors. An auditor is not supposed to correct them. They can, however, request changes if needed.
An assurance targets different parts of your organization, like operations and working methods. Instead of forming a final opinion on your statements, assurance can give you their thoughts about their relevance and accuracy.
The primary purpose of an audit report is to prove that presented financial statements are ethical and fair. Also, they comply with significant accounting standards. Assurance ensures that the records submitted are appropriate or not. It tells the relevant stakeholders about the actual position of your company’s history.
Since an auditor must thoroughly assess your financial records, they have a right to access whatever information is needed. On the other hand, an assurance professional has fewer rights to deliver an essential opinion. Accuracy and evidence are required for both.
Audit statements are a final assessment and opinion. By law, it is a way to disclose the goods and bad in your organization. An audit opinion is actually the final result. Assurance determines what to do with them.
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.
People are usually confused between audit and assurance. And it is considered normal because of the slight difference. Auditor has exclusive rights to check any records of choice. On the flip side, assurance auditors have fewer rights, but they deliver an assessment and solution to manage company records better.
It is essential to maintain your financial statements accurately. We recommend keeping records as organized and accurate as possible to make the process easier for audit experts.
When hiring audit and assurance experts, ensure that the person has relevant education and expertise to provide you with desired results. Do not forget about their transparency.
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.