An audit report serves as a crucial document that communicates the findings and conclusions of an audit conducted by an independent auditor. It provides stakeholders, such as shareholders, investors, and regulators, with an opinion on the financial statements’ accuracy and compliance with accounting standards. Within the audit report, the levels of assurance—limited and reasonable—play pivotal roles in conveying the degree of confidence regarding the financial statements’ accuracy and reliability.
General View of an Audit Report:
An audit report typically comprises several key sections:
1) Introductory Section:
This section includes the report’s title, addressee, and identification of the financial statements audited.
2) Auditor’s Responsibility Section:
Here, the auditor outlines their responsibilities, highlighting that an audit provides reasonable assurance but does not guarantee the complete absence of errors or fraud.
3) Management’s Responsibility Section:
This section articulates management’s responsibility for preparing accurate financial statements and maintaining internal controls.
4) Auditor’s Opinion Section:
The root of the report, this section offers the auditor’s conclusion regarding the financial statements’ accuracy and compliance.
Levels of Assurance: Limited and Reasonable
Limited and reasonable assurance engagements are conducted based on the specific needs and objectives of the stakeholders, determining the level of confidence required regarding the subject matter being audited. These engagements adhere to different standards and entail varying levels of evidence gathering.
Limited Assurance:
In a report with limited assurance, the auditor expresses a less extensive level of confidence. This occurs when the auditor’s review procedures are restricted or when they encounter insufficient evidence to form a complete opinion. The auditor’s conclusion in a limited assurance engagement is presented as a negative assurance statement, often worded as “nothing has come to our attention that indicates that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.”
Limited assurance engagements are typically conducted in situations where stakeholders require moderate confidence in the subject matter but where a full-scale audit might be cost-prohibitive or unnecessary. These engagements are common in review engagements, where the auditor conducts limited procedures to obtain a moderate level of assurance.
Limited assurance engagements are conducted following standards like the International Standard on Review Engagements (ISRE) or the Statement on Standards for Accounting and Review Services (SSARS) in the United States.
In limited assurance engagements, auditors perform a narrower scope of procedures compared to full audits. They gather less evidence and perform limited substantive tests, primarily relying on inquiry and analytical procedures. The evidence obtained is sufficient to provide a limited level of assurance but is not as comprehensive as in a reasonable assurance engagement.
A company might engage an auditor for a review of interim financial statements to provide moderate assurance to stakeholders regarding the financial information’s reliability between annual audits.
Example of Limited Assurance:
“In our review, we noted certain limitations in the scope of our procedures, which prevented us from obtaining sufficient appropriate evidence. Therefore, we express a limited assurance conclusion.”
Reasonable Assurance:
A report providing reasonable assurance indicates a higher degree of confidence in the financial statements’ accuracy. The auditor conducts more extensive procedures and gathers sufficient evidence to support their opinion. This opinion is conveyed as a positive assurance statement, often stated as “the financial statements present fairly, in all material respects, the financial position of the entity.”
Reasonable assurance engagements are conducted when stakeholders require a higher degree of confidence and assurance regarding the subject matter. These engagements are common in full-scope audits, where auditors thoroughly examine financial statements and underlying transactions.
Reasonable assurance engagements adhere to auditing standards such as the International Standards on Auditing (ISA) or the Generally Accepted Auditing Standards (GAAS) in the United States.
In reasonable assurance engagements, auditors conduct comprehensive and extensive procedures. They gather substantial evidence through testing internal controls, substantive procedures, physical inspections, confirmations, and more. The evidence collected is of higher quality and quantity compared to limited assurance, providing a higher level of confidence.
An annual financial audit conducted by an external auditor provides reasonable assurance to shareholders and investors regarding the accuracy and fairness of the financial statements, ensuring compliance with accounting standards.
Example of Reasonable Assurance:
“We conducted our audit in accordance with generally accepted auditing standards, and we believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the company.”
Conclusion:
An audit report serves as a vital tool in validating the accuracy and reliability of financial statements. The levels of assurance—limited and reasonable—reflect the depth of an auditor’s examination and the degree of confidence they can offer regarding the financial statements’ accuracy. Whether providing limited or reasonable assurance, an audit report serves stakeholders by instilling confidence in the financial information provided by the entity, facilitating informed decision-making, and ensuring transparency and accountability.
