Levels of assurance explained

When an audit engagement is performed, the level of assurance stated by the practitioner tells more about the depth. Generally, there are two levels of assurance, which are reasonable and limited assurance. In this article, we differentiate between them.

1. What's reasonable assurance?

A reasonable assurance is an assurance level that is close to absolute assurance. Since it is not possible to give an absolute level of assurance because of the lack of technology to do so and the uncertainty of certain factors that may not be utilized, the practitioner can provide reasonable assurance.

This is a high level of assurance that is provided by the practitioner in the conclusion of his engagement. The phrase “In our opinion the accounts are true and fair” is often used when the practitioner issues a report that ensures reasonable assurance.

2. Limited assurance 

This is another assurance level provided in the report of the practitioner. Here, a moderate level of assurance is provided to the intended users. Most limited assurance goes with a review rather than an audit. 

For example, a review on the corporate governance of a listed company can be based on limited assurance for the first five years due to the fact that there might be not enough information to provide a reasonable level of assurance.

In the report provided by the practitioner, a limited assurance may sound like this: “Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view.”

3. Differences between reasonable assurance and limited assurance

3.1 Definition:

Reasonable assurance (RA) is a high level of assurance issued to the intended users. Limited assurance (LA) is a moderate level of assurance from the practitioner to the users.

3.2 Scope: 

The scope of a RA is usually higher than that of LA. More source documents are verified by the practitioner in a reasonable assurance report. 

3.3 Types of assurance:

Audit and review are the two types of assurance. In a statutory audit, a RA is provided. But in a review, a limited assurance is used.

3.4 Cost:

Reasonable assurance is more expensive than limited assurance. This is because the practitioner requires more time to example the subject matter. Also the volume of the criteria is higher than that of LA.

3.5 Report statement:

“In our opinion the accounts are true and fair” is used for reasonable assurance while “Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view” is utilized in a limited assurance.