Reasonable Assurance in Audit

Audit engagements involve auditors providing their opinion on a subject matter. This audit opinion comes in the form of an audit report. Essentially, it includes the conclusion auditors reach after collecting audit evidence during their work. This conclusion states whether the subject matter is free from material misstatement. However, auditors cannot provide absolute assurance whether that statement is true.

Instead, auditors have to reside to a reasonable or limited assurance. The former is more common in prevalent audit types, including external audits. Therefore, it is crucial to understand what it is and how it differs from the latter.

What is Reasonable Assurance in Audit?

The term reasonable assurance can apply to many fields. However, it is more common in audits where auditors must assure the clients of the integrity of the underlying subject matter. In the auditing field, reasonable assurance refers to an assurance engagement undertaken by auditors. It involves gathering sufficient appropriate audit evidence to draw reasonable conclusions.

The primary feature of a reasonable assurance audit is providing a positively worded assurance opinion. It concludes that the subject matter conforms in all material respects with identified suitable criteria. In most cases, these criteria are predefined before the audit commences. The primary objective of these engagements is to reach reasonable conclusions, which is also essential.

Another characteristic of a reasonable assurance engagement is to provide a high level of assurance. This assurance gives users higher confidence in decisions based on the underlying subject matter. However, it also places significant responsibility on the auditors to perform more thorough procedures. Gathering sufficient appropriate evidence, in this case, is more challenging.

What does Reasonable Assurance in Audit constitute?

Reasonable assurance does not constitute a complete assurance level. Due to time, resources, and other constraints, auditors cannot provide absolute assurance in any engagement. Reasonable assurance also depends on the underlying audit risk associated with an audit engagement. Auditing standards also consider the nature of audit evidence and the characteristics of fraud to play a role in reasonable assurance.

Auditing standards require auditors to perform sufficient audit procedures to back the reasonable assurance. Auditors should plan according to the audit risk to keep the audit risk at a low level. Similarly, auditors can assess that risk in quantitative and nonquantitative forms. Based on these factors, auditors must establish what reasonable assurance may encompass.

What is the difference between Reasonable and Limited Assurance?

The primary difference between reasonable and limited assurance engagements is the conclusions drawn. The level of work performed by auditors will also differ in each case. In the former case, auditors must draw a reasonable conclusion. For limited audit engagements, the conclusions drawn will also be limited. Reasonable assurance engagements require more work compared to limited engagements.

A reasonable assurance engagement also involves a positively worded opinion. On the other hand, a limited assurance engagement involves a negatively worded audit opinion. Similarly, the latter involves lower risks for the auditors. Therefore, they perform lesser audit procedures and work than reasonable assurance engagements.

Conclusion

Auditors may undertake various types of engagements. These engagements require different levels of assurance, including reasonable and limited. Usually, reasonable assurance engagements require more work due to the higher audit risks. On the other hand, limited assurance engagements involve lower audit risks.

Originally Published Here: Reasonable Assurance in Audit