The term audit refers to examination or investigation. In practice, however, it is much more. An audit is a process through which independent auditors assess a subject matter.
Usually, this subject matter includes financial statements. During the audit process, auditors collect audit evidence and evaluate the financial statements based on various criteria.
The primary objective of an audit engagement is for auditors to reach a conclusion. This conclusion represents how the subject matter fares against the identified suitable criteria.
Based on this conclusion, auditors then present their opinion. This opinion comes through the audit report and provides assurance. Usually, it includes a positive assurance.
Sometimes, however, auditors may also present negative assurance. A negative assurance does not implicate the financial statements do not meet the suitable criteria.
However, it is different from a positive assurance. Before understanding how these vary, it is crucial to know the different types of assurance engagements.
What is an Assurance Engagement?
An assurance engagement simply refers to an audit service. In assurance engagements, auditors examine a client’s subject matter.
As mentioned, these auditors must be independent of the company and its management. In most cases, the subject matter is a company’s financial statements. However, it may also include specific reports or other financial or non-financial information.
The primary purpose of an assurance engagement is to convey confidence to users of a subject matter. In most cases, these will include a client’s stakeholders.
Usually, auditors check the subject matter against suitable criteria identified before the commencement of the audit. Auditors convey confidence to the users through assurance.
An assurance engagement is an audit service in which auditors provide assurance to users of a subject matter. There are two primary types of audit assurances that auditors may provide, including positive and negative assurance.
Both of these assurances relate to different types of engagements. Usually, positive assurance comes from reasonable assurance engagements, while negative assurance relates to limited assurance engagements.
What is a Reasonable Assurance Engagement?
A reasonable assurance engagement is an audit service in which the auditor provides reasonable assurance. As with other assurance engagements, auditors gather audit evidence that helps them draw conclusions about the subject matter.
By doing so, auditors can conclude whether the subject matter conforms with the identified suitable criteria.
The report for reasonable assurance engagements is positively worded. Therefore, auditors provide a positive assurance to their clients.
In other words, auditors provide reasonable assurance in a positive form. These engagements usually involve more risks for auditors. Therefore, they require auditors to perform more audit work due to the higher assurance level.
Reasonable assurance engagements usually include external auditors. Since these audits involve higher risks, auditors cover them with more substantive procedures and testing.
Similarly, auditing standards have more strict rules and regulations for these engagements. In these engagements, auditors perform audit procedures to collect evidence and reach a reasonable assurance level.
What is a Limited Assurance Engagement?
A limited assurance engagement isn’t necessarily the opposite of reasonable assurance engagements. Usually, these engagements provide limited assurance to users.
Auditors also gather audit evidence with limited assurance services. However, they require less audit evidence to reach limited assurance. Limited assurance engagements include different criteria compared to reasonable assurance engagements.
The report for limited assurance engagements is negatively worded. Therefore, these engagements provide a negative assurance to users. It does not imply that auditors disapprove of the subject matter or the suitable criteria.
Instead, a negative assurance still provides users with confidence but in a negative form. Limited assurance engagements aren’t as broad as reasonable assurance engagements.
Limited assurance engagements usually involve lower risks for auditors. Therefore, auditors perform lesser audit work to reach a negative assurance.
Furthermore, these engagements come under fewer rules and regulations than reasonable assurance engagements. The primary objective for these auditors is to obtain limited assurance, which provides limited confidence to users.
What is Positive Assurance?
A positive assurance is a positively worded assurance in the audit report. As mentioned, auditors gather audit evidence to ensure the subject matter satisfies the suitable criteria.
In positive assurance services, auditors provide their opinion positively. Usually, auditors conclude that they believe something is true or correct, which provides a positive affirmation.
A positive assurance relates to reasonable assurance engagements. Due to the positive wording used, it provides a higher level of confidence to the users. A sample positive assurance engagement opinion may state the following.
In our opinion, the financial statements give a true and fair view of the financial position of ABC Co. as at 31 December, 20XX, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
In the above opinion, auditors conclude that the financial statements give a true and fair value to a company’s operations.
Similarly, it provides suitable criteria under which auditors examine the subject matter. In this case, the subject matter includes the company’s balance sheet, income statement, and cash flow statement. The suitable criteria are the IFRS.
What is Negative Assurance?
Negative assurance is a negatively worded assurance in the audit report. In negative assurance services, auditors use a negative tone to provide their opinion.
However, it does not conclude that the auditors believe the subject matter negates the suitable criteria. It implies that the auditors couldn’t find anything to disprove the subject matter during their work.
A negative assurance relates to limited assurance engagements. However, since auditors use negative wording, it does not provide a higher level of confidence.
Similarly, it implies that for the audit work performed, auditors did not find audit evidence to disprove the subject matter. A sample negative assurance engagement opinion may state the following.
Nothing has come to the attention that causes us to believe that the financial statements of ABC Co. as of 31 December, 20XX are not prepared, in all material respects, in accordance with an applicable financial reporting framework.
In the above opinion, auditors do not assure the users of the financial statements are true and fair. Instead, it implies that auditors did not come across any information that can prove otherwise.
Positive vs Negative Assurance: What are the main differences?
From the above information, it is straightforward to conclude the difference between positive and negative assurance. Some of the main differences are as below.
The primary difference between positive and negative assurance is the wording. As mentioned, positive assurance services use a positively worded conclusion.
On the other hand, negative assurance services provide an opinion with a negatively worded conclusion. However, it does not convey an adverse message or opinion.
Due to the wording used, the statement provided in both assurance services also differ. In positive assurance, auditors state that in their opinion, the subject matter conforms to the suitable criteria.
However, the negative assurance expresses that auditors did not come across information that implicates otherwise.
Positive assurance services provide a higher assurance level to the users of the subject matter. In contrast, negative assurance services convey lower confidence to the users.
This difference also relates to the risks involved and the amount of audit work performed. Usually, positive assurance requires more procedures compared to negative assurance.
As mentioned, positive assurance is a part of reasonable assurance engagements. Usually, the users expect more assurance with these engagements.
Therefore, they require auditors to use positive assurance. Negative assurance relates to limited assurance engagements. Due to the lower assurance required, auditors use a negatively worded conclusion.
Auditors provide both positive and negative assurance as a part of their audit reports. Positive assurance relates to reasonable assurance engagements.
On the other hand, negative assurance comes with limited assurance engagements. Both of these differ from each other in various fundamental regards. These include the wording, statement, assurance level, and usage.