Assurance services play a critical role in the accounting profession. But what exactly are they and why are they so important?
In this comprehensive guide I’ll demystify assurance services and explain everything accounting professionals need to know.
Whether you are pursuing a career in public accounting or want to better advise your clients, understanding assurance is essential. Let’s dive in!
What Are Assurance Services in Accounting?
Assurance services refer to independent professional services that improve the quality of information used for decision making. They are typically provided by CPAs (certified public accountants) or chartered accountants.
The goal is to provide assurance or comfort that the information being used by management and stakeholders is reliable and accurate. This reduces information risk and allows for better decisions.
Common types of assurance services include
- Financial statement audits
- Reviews of financial statements
- Compilations of financial information
- Agreeing financial information to source documents
- Internal control examinations
- Risk assessment services
Essentially, the CPA performs procedures to “assure” that the information being used is free from material misstatement. They then issue a report with their opinion or findings.
Why Are Assurance Services Important?
There are several key reasons why assurance services play such a vital role:
Improves Information Quality
Assurance services enhance the quality and context of information used by management, investors, regulators, and other stakeholders. By verifying accuracy and reliability, assurance provides confidence in decision making.
Mitigates Information Risk
Information risk refers to the likelihood that poor data will lead to faulty choices. Independent assurance from CPAs reduces this risk substantially.
Promotes Transparency & Trust
The assurance process makes company disclosures and financial reporting more transparent. This builds public trust and confidence in capital markets.
Compliance with Regulations
Certain regulations, like Sarbanes-Oxley, require audited financial statements and assurance on internal controls. This protects investors.
Supports Management & Governance
Assurance provides those charged with governance an independent perspective on risks, controls, and reliability of information used internally.
The Different Levels of Assurance Services
Not all assurance services provide the same degree of confidence. There are three main levels of assurance defined by audit standards:
Reasonable Assurance
This is the highest level of assurance given by CPAs. The procedures performed provide a high, but not absolute, level of assurance.
Example: An audit of financial statements.
Limited Assurance
A moderate level of assurance is obtained from the CPA’s procedures. The risk of misstatement is reduced but not eliminated.
Example: A review of quarterly financial statements.
No Assurance
No assurance is provided by the CPA regarding the accuracy of information. They merely compile information without verification.
Example: Compiling monthly financial statements.
Higher risk areas of a business typically require reasonable assurance. More routine areas may only require limited assurance. Understanding these levels helps management obtain a cost-effective mix of assurance services.
5 Key Types of Assurance Services
Now let’s examine the most common assurance services you’ll encounter in the accounting world:
1. Financial Statement Audits
The most well known assurance service is an audit of an entity’s financial statements, like the 10-K report required for public companies. Obtaining reasonable assurance helps verify that the statements conform to GAAP and are free of material misstatements.
Audits also include testing of internal controls over financial reporting. The CPA issues an audit opinion letter stating whether the financial statements are presented fairly.
2. Review of Financial Statements
A review provides limited assurance through analytical procedures and inquiries with management. The CPA performs these procedures to determine if material modifications to unaudited financial statements are needed.
They then issue a report stating whether they are aware of needed changes. Reviews cost less than audits but provide less confidence.
3. Compilation of Financial Statements
Here the CPA simply compiles information into a financial statement format without obtaining any assurance. They do not audit or review information and provide no opinion or conclusions. Managements must take responsibility for accuracy.
4. Agreed-Upon Procedures
CPAs can perform specific procedures agreed to by management and report just the factual findings. No overall conclusion or opinion is expressed. Common procedures include verifying loan balances or royalty payments.
5. Examinations of Internal Controls
A CPA can provide assurance on the effectiveness of an organization’s internal controls over financial reporting or operations through a SOC 1 or SOC 2 report. This identifies risks and tests whether controls sufficiently mitigate them.
Boards of directors often request these examinations to fulfill oversight duties. The reports are useful for managing risk.
Who Uses Assurance Services and Why?
Assurance services provide value to several important stakeholders:
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Management – Enhances quality of operational and financial data used internally for decisions and performance measurement. Helps ensure controls are functioning properly.
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Investors – More reliable public disclosures reduces information risk and uncertainty around financial health and prospects. Builds confidence in markets.
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Regulators – Demonstrates compliance with reporting regulations and appropriateness of internal controls. Protects public interest.
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Lenders – Audited statements provide assurance of accuracy when making lending decisions tied to financials. Reduces credit risk.
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Suppliers/Partners – Reliable reporting reduces counterparty risks when trusting the entity’s stability for contracts and trade terms.
In essence, assurance services allow stakeholders to place greater faith in the information they use to make important decisions and evaluations. This informs better choices that drive operational and economic activities.
Key Skills Needed to Perform Assurance Services
Providing quality assurance requires certain knowledge and abilities from accounting professionals:
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Accounting expertise – Strong grasp of accounting principles and standards is mandatory to assess reporting and disclosures.
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Auditing skills – Must be able to plan and perform audit procedures, identify risks, and evaluate results.
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Communication abilities – Present findings clearly and effectively to clients, regulators, and financial statement users.
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Professional skepticism – Maintain questioning mind and critically assess evidence when conducting procedures and evaluations.
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Ethics – Unwavering integrity and objectivity is crucial. Resist influence of self-interest and bias.
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Quality focus – Dedication to meticulous work and adherence to professional assurance standards.
Developing these skills takes commitment but is very rewarding. Professionals who master assurance services are highly valued.
Pursuing a Career in Assurance Services
If you find assurance services intriguing, you can absolutely make it your career focus!
The most common path is to start in public accounting at a CPA firm. As an auditor, you’ll gain immediate hands-on experience conducting a range of assurance engagements. Over time, you can advance to manage engagements and client relationships.
With managerial experience, you may move into a partner role taking responsibility for an entire book of business. Or you may leverage your expertise to become a Chief Audit Executive or leader of the assurance practice.
Other options include specializing in:
- IT audit and cybersecurity assurance
- Internal audit services
- Forensic accounting investigations
- Risk and controls advisory services
You might also join the assurance division of a corporation to handle activities like SOX compliance. Experience from public accounting is highly valued.
If you have an inquisitive mind, skepticism, attention to detail, and interest in upholding financial integrity, a career in assurance services could be very rewarding. The expertise you gain is invaluable across the business world.
Frequently Asked Questions
What education do you need to perform assurance services?
Most assurance providers have a bachelor’s degree in accounting or finance. Certification as a Certified Public Accountant (CPA) is generally required as well. This involves passing the uniform CPA exam plus experience requirements that vary by state.
Can non-accountants provide assurance services?
While accountants dominate this field, technically anyone can offer assurance services, except for audits of financial statements. Audits, reviews, and compilations require a CPA license. Advanced certifications like the CA (Chartered Accountant) are also preferred. But other assurance work can be performed by non-CPAs with specialized expertise.
What types of companies offer assurance services?
Public accounting firms are the primary providers. The Big 4 accounting firms (Deloitte, PwC, EY, KPMG) handle a substantial share of major corporations. Mid-size and small firms also offer assurance services regionally and locally. Internal audit groups within companies also perform assurance functions.
How do you actually perform assurance procedures?
Common procedures include risk assessment, testing controls, verifying account balances through confirmation or documentation, analytical review, recalculations, interviews, and observation. Statistical sampling is often used to test a representative selection rather than entire populations.
What differentiates assurance services from consulting services?
Consulting
