An assurance service is an engagement by a professional to provide confidence to a third party regarding a subject matter usually based on some criteria. An assurance engagement can come in the form of an external audit or a review. In this article, we will explain this term in detail.
1. Meaning of assurance service
It is defined as a service provided by a professional on behalf of a third party to provide a level of assurance with regards to a subject matter based on certain criteria. An assurance will result in a decision which must be provided in a report.
Such a report will show the level of assurance with regards to the engagement. This can be a reasonable or limited assurance. The professional involved in an assurance service must be someone with expert knowledge of the subject matter. For example, in an audit engagement an external auditor provides a level of assurance with regards to the subject matter which is the financial statements.
The third party of an assurance service is the individual or group of individuals with a stake or interest in the subject matter. For example, if the subject matter is the financial statements the third party is mostly the shareholders of the company. Next is the criteria. This is the basis for judgment. For statutory audit, the criteria includes company laws and accounting standards applicable in the country.
Assurance service can be done in other areas as well. The finance manager may prepare a budget of a company to be presented to the board of directors. However, to ensure that the budget represents fairly what it represents, the director may engage an accounting consultant to provide an assurance or confidence on the budget before they can examine it.
In this case, the subject matter becomes the “budget” and the third party is the board of directors. However, this must be based on some criteria which is determined by the third party.
2. Reasons for assurance engagement
A third party may request an assurance service for the following reasons
- To satisfy statutory obligations
- Boost confidence on the subject matter
- Adds credibility to the report provided.
3. Types of assurance services
There are two types of assurance engagements in accounting and finance. These are:
3.1 External audit
External audit is performed by an external auditor. As explained the auditor will review the financial statement as to if it complies with statutory laws and international financial reporting standards.
3.2 A review
This is done in other areas. Accounting consulting firms and external auditors can be involved in this area. It can involve a review of the entity’s information system, its budget, internal control, and more.
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