It’s important to understand how auditing and assurance processes work. Both processes are used when evaluating the financial records of a company. Want to learn the key differences between audit and assurance? Keep reading to find out.
Why Are Audits and Reviews Important?
Conducting audits and reviews is important because it allows a company to see whether it is gaining optimal financial growth. Companies usually have shareholders, and it’s these shareholders who get to decide whether to sell or hold their shares. They usually decide whether to share or hold by looking at the financial health of the companies they are invested in, and the financial health of a company is typically determined through audits and reviews.
Audits and reviews are also of benefit to other parties connected to companies, including:
- Prospective shareholders
- Employees
- Analysts
- Creditors
- Lenders
- Regulators
- Governments and communities
There are usually several types of information included in an audit and review, each of which is meant to enhance the credibility of the data and information being listed in the financial report. Some of the more common types of information included in a financial report include:
- Financial statements
- Notes to financial statements
- Director’s declaration regarding financial statements and notes
The purpose of including these different types of information in a financial review stems from shareholders’/stakeholders’ desire to use the information to make important decisions, such as:
- Deciding whether to invest
- Deciding whether to divest
- Deciding whether to lend money/assets to the company
- Deciding whether to contract with the company
Why Is It Important to Understand Financial Records?
The information needs of a user determine what information to collect during the auditing process. This allows the entity providing the auditing services to laser-focus on certain areas of concern. When doing an audit, it is reasonable for an auditor to expect that the users of the financial reports used during the audit have:
- Reasonable knowledge relating to the economic activities of the company being audited
- A willingness to study the information and data used in the financial report
- An understanding that the financial report is being audited to various levels of materiality
- Recognition that there are inherent uncertainties when listing estimates, judgment, and consideration of future events
- Can make reasonable economic decisions based on the information listed in the financial statements
What Is an Audit?
There are various types of audits, but when speaking in the specific context of professional auditing services, most of them tend to lean toward financial status. When an audit is conducted, this means that the entity providing auditing services conducts a systematic review and assessment of a company’s financial documents and records.
Important to note is that not all companies have to conduct annual audits or audits of any type. The purpose of the audits is to provide reasonable assurance, but very important to understand is that audits are not meant to provide absolute assurance. Instead, they are simply supposed to provide an assurance the financial records audited provide some type of reasonable overview of a company’s financial health.
What Is Assurance?
Assurance is an expression used when an auditor draws a conclusion regarding the financial health of a company. An assurance practitioner is the one who provides the conclusion. The purpose of the practitioner is to give a report that helps stakeholders, lenders, shareholders, and any other entity the go-ahead that a company is worth investing in. Not all practitioners draw this type of conclusion. In fact, there are three main levels of assurance.
Reasonable assurance
When reasonable assurance is provided, this takes place, when for example there is an audit of a financial report sufficient information is gathered to determine that the assurance practitioner had sufficient evidence to determine his or her conclusion.
Limited assurance
Limited assurance is provided when there is a less detailed procedure used to determine a certain conclusion, such as during a 6-month review of a company’s financial reports.
No assurance
No assurance means there was no assurance provided because even though factual findings were provided and confirmed, but no opinion has been formed.
What Is the Difference Between Audit and Assurance?
As you can see, the auditing process itself is what takes place when a company’s financial records are being examined. The assurance process is what takes place when verifying the audit process. Assurance is what is formed by a practitioner as they review how the audit took place and whether it is legit to determine (based on the audit) a realistic conclusion as to a company’s financial health.
It is important to note, however, that there is a difference also between an audit of a financial report and a review of a financial report. A review of a 6-month financial report, which is generally referred to as an interim financial report, provided limited assurance that the auditor is doing all they can to provide accurate views of a company’s health.
Also important to note is that absolute assurance cannot be obtained in financial report audits for several different reasons. First and foremost, because it would be impractical for the auditing services provider to test and audit every single transaction listed in most companies’ financial reports. This mainly stems from time constraints and limitations. It’s also impossible because the preparation of a financial report typically involves making estimates regarding future practices which cannot always be accurately predicted regardless of how experienced an auditor is.