Assurance services are a type of professional service provided by certified public accountants (CPAs) or chartered accountants (CAs) to improve the quality, reliability, and credibility of financial and non-financial information. These services help stakeholders, such as investors, lenders, regulators, and management, make informed decisions based on accurate and reliable information.
Assurance services typically involve the examination, review, or verification of financial statements, internal controls, regulatory compliance, and other matters. The primary goal of assurance services is to provide an independent, objective assessment that reduces the risk of errors, fraud, or misrepresentation in the information being presented.
Examples of assurance services include:
- Financial statement audits: The most common type of assurance service, where auditors review a company’s financial statements to provide an opinion on whether they are presented fairly and in accordance with the applicable financial reporting framework (e.g., GAAP, IFRS).
- Reviews of financial statements: A less rigorous form of assurance service compared to an audit, where accountants perform analytical procedures and inquiries to obtain a limited assurance that there are no material modifications required for the financial statements to be in accordance with the applicable financial reporting framework.
- Attestation engagements: These services involve the examination or review of a specific subject matter or assertion, such as the effectiveness of internal controls over financial reporting or compliance with specific regulations.
- Agreed-upon procedures: These are engagements where an accountant performs specific procedures, agreed upon by the client and other stakeholders, to provide factual findings on a particular issue, without expressing an opinion or conclusion.
- Non-financial assurance: This type of assurance service focuses on non-financial information, such as sustainability reports, corporate social responsibility reporting, or IT systems reliability.
Example of Assurance Services
Let’s consider an example of a financial statement audit, which is a common type of assurance service.
Example: ABC Corporation, a publicly-traded company, is required to have its annual financial statements audited by an independent accounting firm. The company engages XYZ Accounting Firm to perform the audit.
During the audit, XYZ Accounting Firm will:
- Plan and execute the audit: The auditors will develop an audit plan that includes identifying key risk areas, determining materiality levels, and selecting appropriate audit procedures.
- Test internal controls: The auditors will assess the design and effectiveness of ABC Corporation’s internal controls over financial reporting, which may include testing controls around revenue recognition, inventory management, and accounts payable.
- Perform substantive testing: The auditors will perform detailed tests on the company’s financial statement line items, such as confirming account balances with third parties, testing a sample of transactions, and conducting analytical procedures to identify any unusual fluctuations or trends.
- Evaluate audit evidence: The auditors will gather and evaluate the evidence obtained during the audit to determine if it is sufficient and appropriate to support their opinion on the financial statements.
- Form an audit opinion: Based on the audit evidence, the auditors will form an opinion on whether ABC Corporation’s financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP or IFRS).
- Issue an audit report: The auditors will issue a formal report that includes their audit opinion, a description of the scope of the audit, and any significant findings or deficiencies identified during the audit process.
By conducting this financial statement audit, XYZ Accounting Firm provides assurance to ABC Corporation’s stakeholders, such as investors, lenders, and regulators, that the financial statements are reliable and can be used to make informed decisions about the company’s financial performance and position.