Understanding Assurance Services: Risk Reduction & Improved Decisions

Assurance services are an independent examination of a company’s processes and controls. Assurance aims to reduce information risk by improving the quality or context of the information. 

Accounting professionals are qualified independent practitioners who can perform such services. Reducing risk allows intended users to refrain from making impaired decisions. Thus, assurance improves decision-making for users, such as investors and analysts.

Summary

• Assurance services improve the quality of information to allow for better decision making.
• Assurance encompasses five key elements: relationship, subject matter, criteria, evidence, and conclusion.
• Audits are one type of assurance service and are subject to international standards.

Understanding Assurance Services

Assurance focuses on analyzing the processes, controls, and operations of an organization. It looks to determine whether the business is operating with appropriate accuracy. For example, a CPACPA vs CFA®When considering a career in corporate finance or the capital markets you will often hear people asking, “Should I get a CPA or CFA?” and “Which is better?”.  In this article, we will outline the similarities and differences of the CPA vs CFA designations and try to steer you in the right direction about will be hired to provide an assessment of a business’s procedures surrounding the preparation of their accounting and/or financial records.

However, entities that provide the assurance service are not strictly analyzing financial systems; they can also look at other areas of the business, such as IT systems, internal controls, or other procedures in different departments.

Also, assurance services entail the testing of validity within past data of the business cycleBusiness CycleA business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate. It explains the. The most well-known assurance service is financial statement audits, but they include a wide range of other professional services.

Assurance Services – Components

Assurance or engagement services are composed of five elements. Below is a list as identified in the International Framework for Assurance Engagements:

Element of EngagementDescriptionThree-Party Relationship• Includes a practitioner, responsible party, and intended users.
• The practitioner is the qualified person(s) carrying out the assurance.
• The responsible party is the preparer of the information presented to the practitioner.
• The intended users rely on and make informed decisions in the outcome of the assurance.
• In our example below, the practitioner is Mr. Hahn. The responsible party is Miss Lock, and the intended users would be shareholders.
• In the case of an internal audit, the responsible party may be lower management. The intended users would be senior management.The Subject Matter• The balance sheet, income statement, or statement of cash flowsBenchmark Criteria• The presence of appropriate measures to check the above subject matter against.
• Such measures can be the International Financial Reporting Standards.Evidence of Meeting the Criteria• The practitioner may refer to themselves as a skeptic. They look for evidence in the subject matter of being free of material misstatement.The Assurance Report• A conclusion, written in a report form, that relates to the subject matter.

It is interesting to note that on the opposite end of the spectrum is consulting. Consulting services create forward-looking information for an organization to better position itself. For example, implementing a 12-month rolling cash forecast to make long-term decisions. Assurance assesses past information and ensures it is valid.

Practical Example

Let’s look at an assurance through the following example. Amplified Inc. is a public airline and offers passenger airline service. The company is being audited for Q1 2019. Its balance sheet shows $2 million in accrued fuel as of March 31, 2019.

Mr. Hahn works for the public accounting firm performing the audit. He wants to verify the accuracy of the accrued liabilitiesAccrued LiabilityAn accrued liability represents an expense a business has incurred during a specific period but has yet to be billed for. Accrued liabilities by selecting a sample of 30 entries. The Assistant Controller of Amplified Inc, Miss Lock, assumes the responsibility of providing backup. Fuel slips signed by the pilots, per location, and the published rate per liter are then provided.

Mr. Hahn verifies the completeness and validity of the information presented. He concludes that the accrued liabilities are representative of actual amounts owing.

Changes in Assurance

In the U.S., the Sarbanes-Oxley Act of 2002 Sarbanes Oxley ActThe Sarbanes-Oxley Act is a U.S. federal law that aimed to protect investors by making corporate disclosures more reliable and accurate.became a law to protect users of financial information. Major accounting scandals, such as Enron, degraded confidence in the world of investing. As such, there became wider enforcement of reliable and accurate disclosures.

Another earlier and critical step in improving assurance services goes back to 1993. The American Institute of CPAs (AICPA)American Institute of CPAs (AICPA)The American Institute of CPAs (AICPA) is a non-profit organization of certified public accountants in the U.S. who creates and grades CPA examinations. held an Audit and Assurance Conference. It sought to address concerns by users of such services and their decline in use.

A special committee on assurance services formed shortly afterward and issued a report. In 1997, the report of the special committee voiced the needs of these clients.

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

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