Running a small business, for-profit or not-for-profit, is a task with many moving parts. Relationships are among them: banks, insurance providers, and bonding companies, to name a few. Such partners do not enter into transactions lightly and need things such as financial statements and financial reports. They want evidence that a business conducts itself with competence and integrity. That's why financial statements and records are keys to this discovery. Verifying the authenticity of financial reports is step one. Accounting and assurance are means of doing this but they are not identical processes. Here is a look at audit vs assurance.
What Is an Audit?
A financial audit is an impartial review and analysis of a company's financial statements and financial reports, and financial records that seeks to confirm the fairness and accuracy of their claims relative to the activities they represent. Audits of financial records fall into three categories based on the auditor:
- Internal audit - where company accountants perform an in-house evaluation of financial records.
- External audits - where a third-party firm of certified public accountants (CPAs) conducts a further review of financial records.
- IRS audits - where the U.S. Internal Revenue Service examines a company's financial records to determine tax liability.
Among the financial statements under scrutiny are the income statement, the cash flow statement, and the balance sheet. The income statement reveals a business's income and spending for a given period. The cash flow statement, meanwhile, reflects more of a summary of monies in terms of revenue and expenditure. A balance sheet serves as a snapshot of the company's shareholder equity, liabilities, and assets at a specific point in time. Unless they are internal, the audit process is a subset of broader assurance services.
What Is Assurance?
Assurance is an examination of those processes by which the accounting records are produced. Many outside entities and investors seek assurance services to gain confidence in a company's viability and sustainability. In essence, the assurance dives deeply into features of a business that contribute to the numbers on an income statement, balance sheet, or cash flow statement, for example. It entails a broader review, looking at quality control mechanisms, employee feedback, information technology systems, and organizational behavior, among other company dynamics.
What Is an Assurance Engagement?
First, an assurance engagement requires three participants, i.e., three parties to the project: the company, the independent auditors, and the beneficiaries, meaning those investors or insurers who need this information to proceed.
Secondly, an assurance demands subject matter -- the financial records almost all of the time.
Thirdly, target criteria must be present to measure the subject matter against. Many assurances rely on the International Financial Reporting Standards (IFRS) or other international auditing standards for these benchmarks.
Fourthly, the independent CPAs performing the assurance also look for the fulfillment of these benchmarks. In fact, their job is to find areas where the business is failing to meet the criteria, be they IFRS or other rigorous standards.
Finally, whether they find discrepancies or find none, the auditors are then charged with reporting their findings. This is the document by which the intended audience will make its decisions. Again, assurance requires a deep dive that extends beyond traditional accounting records. Invoices, receipts, personal interviews, company literature, and established processes are all fodder for comprehensive assurance.
Worth remembering is that assurance is to provide stakeholders, e.g., investors, creditors, or surety providers, with reasonable confidence that an investment is safe. While accountants can be employed in criminal investigations, assurances do not serve that purpose. At the same time, CPAs conducting assurances have the responsibility of reporting risks for fraud when analyzing a company’s policies and procedures. If a system allows for too much trust in too few individuals, for instance, the auditor is obliged to call out that hazard, without making specific accusations.
Types of Assurance Engagements
Assurance engagements can be one of two kinds of assessing processes.
- A reasonable assurance engagement seeks to report a low level of risk after a financial statement audit. The auditor in such instances can honestly say that the accounting entries and accounting records correspond with the actual numbers they represent.
- A limited assurance engagement differs from a reasonable assurance engagement in that its final expression is a negative truth: nothing discovered in the assurance leads the auditor to suspect that the presented accounting information conflicts with the facts.
Assurance vs. Audit: What Is the Difference?
When distinguishing between audit services and assurance services, it is best to remember that there is overlap in that an audit can be part of, or a type of, an assurance engagement. At its core, an audit aims at ascertaining the factual basis of what is presented in a financial statement or other financial data. Simply stated, if a ledger shows 100 laptops purchased and there are only receipts for 40, the auditor has cause for concern. Unless other supporting documentation comes to light, the accuracy of the bookkeeping is suspect. Audits simply say what is and what is not.
What is/are the reason(s) for those missing receipts for 60 laptops? It might be as innocent as a bookkeeper’s oversight or as nefarious as fraudulent activities. This is where the assurance goes deeper. The process of procurement must be defined. Bookkeeping staff must be interviewed. Document collection, organization, and retrieval procedures must be identified. Internal controls, too, must come under scrutiny. When all is said and done, the assurance discovers the reasons that an audit cannot (or can) testify to the integrity of financial data. Whereas the audit reveals the presence or lack of integrity in financial information, assurance testifies to, or against, the ways in which those numbers are assembled.
Herein lay the major differences between audit and assurance:
- Definition: An audit verifies or debunks the accuracy of information on a company’s financial reports. An assurance evaluates the processes that lead to the financial data appearing on the financial report.
- Aim: An audit can be a part of the assurance process or it can be one of several internal controls. Alternatively, it can serve as an enforcement tool by a government taxing authority.
- Agent: Audit services are performed by external and internal auditors, depending on their purposes. Assurance engagements are exclusively the purview of external auditors, primarily certified public accountants.
- Uses: Audits can serve a number of purposes, from legal prosecution to intra-organizational efficiency to public reputation. Assurances serve mainly to establish a company’s performance, creditworthiness, and risk level for outside entities with which it does business.
- Timeline: Audit times vary relative to the size and scope of a business. On average, one can take approximately 12 weeks, beginning to end. A limited assurance can last as long as six months.
Audit vs. Assurance: The Bottom Line
There are many differences and many similarities between audit and assurance services. As demonstrated, the differences between audit and assurance are both subtle and clear. When seeking a professional for either task, the best course of action is to retain a professional CPA who has performed both services and possesses a record of success and efficiency. Susan S. Lewis CPA, LTD. is a firm dedicated to the highest accounting principles and standards. We have the record to prove it. Contact us for audit and assurance services.