Reasonable Assurance

What Is Reasonable Assurance?

Reasonable assurance is a term used in auditing that refers to the level of confidence an auditor has in the accuracy and completeness of the financial statements being audited. The main aim of reasonable assurance is to provide a measure of confidence to users of the financial statements that the information they rely on is accurate and reliable.

The benefit of reasonable assurance in auditing is that it provides people with a reliable and accurate picture of a company's financial health, which is important for making informed decisions and maintaining trust in the financial system. In addition, it promotes transparency and accountability in financial reporting, as auditors provide an independent and objective assessment of the financial statements.

• Reasonable assurance is a term in auditing used to signify the level of confidence an auditor can offer regarding the accuracy and completeness of the financial statements being reviewed.
• It plays a crucial role in enhancing transparency and accountability in financial reporting and bolsters the credibility of the financial statements.
• In a reasonable assurance engagement, auditors provide an opinion on whether the financial statements are free from material misstatements, signifying a higher level of confidence. In contrast, in a limited assurance engagement, auditors perform fewer procedures, resulting in a lower level of assurance provided.

Reasonable Assurance In Auditing Explained

Reasonable assurance in auditing is the level of trust auditors have while ensuring the accuracy and completeness of financial statements. First, they understand the company's operations, systems, and risks by reviewing past reports and data. Then, they assess the risks of significant errors, considering internal controls and reporting processes.

Auditors collect evidence to confirm financial statements' accuracy through various methods, like reviewing documents and testing controls. After gathering evidence, they carefully check for material errors. If found, auditors work with the company to correct them. Finally, auditors issue an opinion on the financial statements. It's an unqualified opinion stating the statements are accurate if they have reasonable assurance. If not, it's qualified or adverse, depending on the error's severity.

Overall, this process ensures accurate financial information. Still, many factors can affect the level of assurance auditors can provide, including the complexity of the business, the significance of errors, fraud risk, internal controls, reporting quality, and data availability.

Examples

Let us look at reasonable assurance examples to understand the concept better:

Example #1

Let's look at how EY Australia and the Australian Securities and Investments Commission (ASIC) work together in auditing and external quality assurance. ASIC regularly checks audit practices to ensure that financial audits maintain high quality and reliability. This involves reviewing files from a selection of audit projects and assessing quality control systems. ASIC's goal is to provide reasonable assurance that audit firms are upholding strong audit quality standards.

In a recent ASIC inspection cycle, which looked at audits conducted between July 2019 and June 2020, the reviews were still in progress, and the results were due to be published in December 2020. In a previous review for the year ending June 2019, ASIC observed that EY Australia had collected insufficient evidence in 10 out of 45 areas.

This meant they couldn't offer reasonable assurance that there were no significant errors in the related financial reports. Importantly, this doesn't necessarily mean there were actual mistakes in these areas, but rather, more evidence was needed to provide reasonable assurance. ASIC's inspections focus on a specific sample of audits, especially those that are complex and high-risk, but these findings don't represent the entire audit market. Nonetheless, ASIC's efforts are vital in upholding the credibility and trustworthiness of financial reporting and auditing in Australia.

Example #2

Imagine a scenario where a small accounting firm is tasked with auditing the financial statements of a local restaurant chain. In this case, the auditor follows a thorough and systematic process that includes planning, risk assessment, testing, evaluation, and reporting, as described in previous answers.

Throughout the audit, the auditor conducts various procedures to gather evidence regarding the accuracy and completeness of the financial statements. This involves examining documents, performing analytical assessments, and testing internal controls. 

The auditor then assesses all the evidence collected during the audit to determine if there are any significant errors in the financial statements. If the auditor is reasonably assured of no material misstatements, they issue an unqualified opinion in their audit report. This unqualified opinion signifies that the financial statements are free from significant errors.

Benefits

There are several advantages of reasonable assurance in the context of auditing and financial reporting:

• Enhanced Credibility: It helps to enhance the credibility and reliability of financial reporting by providing a level of assurance to the users of the financial statements that the information is accurate, complete, and free from material misstatements.
• Improved Decision Making: It provides users of the financial statements with confidence in the information presented, enabling them to make informed decisions based on reliable financial information.
• Mitigation of Risks: Reasonable assurance helps to identify and mitigate risks that may impact the financial statements, enabling the entity to take corrective action and improve its financial reporting processes.
• Protection of Stakeholders: Reasonable assurance protects stakeholders, such as investors, creditors, and regulators, by reducing the likelihood of financial misstatements or fraud and by increasing the transparency and accountability of the entity.

Reasonable Assurance vs Limited Assurance

Here are the key differences between the two:

Reasonable Assurance	Limited Assurance
Provides a higher degree of assurance.	Provides a lower degree of assurance.
Involves comprehensive procedures, including extensive risk assessment, testing, and evaluation of internal controls and financial statement accounts.	Involves a more limited scope of procedures.
Issues an unqualified opinion, indicating that financial statements are free from material misstatements.	Issues a qualified opinion, signifying a material departure from the financial reporting framework, but not severe enough to warrant an adverse opinion.

Frequently Asked Questions (FAQs)

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This article has been a guide to what is Reasonable Assurance. Here, we compare it with limited assurance and explain its examples and benefits. You may also find some useful articles here -

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