Assurance in accounting plays a critical role for a multitude of parties. The goal is to verify a company’s controls, processes, and financial operations to help mitigate future risks.
Financial statement analysis assesses the financial health of a company. However, assurance accounting takes a deeper look at the systems and frameworks. Below we detail all you need to know about assurance and the different types of services.
What Is Assurance in Accounting?
So, what is assurance in CPA and accounting? Assurance accounting is the process of assessing financial records and accounting entries. The process involves confirming that the available documents are relevant to the accounting system.
Not only does assurance evaluate financial report accuracy, but it also analyzes operations, procedures, and other company processes. Assurance also applies to services offered by lawyers, accountants, and other professionals (assurance services).
These services assist companies in identifying unforeseen issues and mitigating risks. There are different ways to receive assurance services, which include four points of defense:
- Daily risk management during regular activities of an organization
- The overall strength and control of the organizational framework
- The perspective of an internal auditor
- External view from an assurance provider
Types of Assurance Services
Assurance providers deliver services in various forms. All options provide relevant information for sound decision-making. Below is a set of the most popular assurance services.
Risk Assessment
Risk assessment assurance services will make sure a company’s profile of risks is fully comprehensive.
It also assesses if the entity has durable systems to manage and mitigate these risks effectively. Companies face more unfortunate events and risks than ever before, which makes this service essential.
Investors and managers are often concerned about whether companies have evaluated and identified these risks. With risk assessment assurance services, an entity can know how well its systems can address any future threat.
Business Performance Measurement
Financial statements provide an overall snapshot of an entity’s financial health. However, managers and investors require comprehensive insights to make a sound decision.
Most external stakeholders will demand a “balanced scorecard” to understand the internal frameworks of an organization.
This need is where the assurance service of business performance management comes into play. Professionals will evaluate a company’s performance management system and how reliable it is.
This service also assesses whether the system’s information captures the company’s objectives and goals. Businesses will also hire assurance services to see how well the performance compares to its competition.
Information Systems Reliability
Many internal and external stakeholders rely on quality information that is accessible online. Because of the internet, relevant information must be available in real-time.
This assurance service evaluates if the company’s systems have a robust design. If the company’s solution accurately and consistently reports data in real-time, then it passes the assessment.
The goal is to understand if the internal information systems (non-financial and financial) deliver reliable data, which leads to accurate operating decisions.
Electronic Commerce
Electronic commerce, also referred to as e-commerce, has redefined how companies deliver products and services to their customers. However, electronic commerce growth has been slowed by the diminishing confidence in the various entity systems.
Electric commerce assurance services analyze whether a company’s tools and systems for e-commerce provide proper data security, integrity, reliability, and privacy.
A company may be performing well with e-commerce sales, but this assurance service will showcase an accurate snapshot of its sustainability.
Healthcare Performance Measurement
The goals of the healthcare system are constantly changing. Under the initial fee-for-service model, entities were incentivized to deliver more services than competitors. Now, managed care will reward entities who provide the fewest amount of services.
Therefore, healthcare employers and recipients care a lot about the availability and quality of healthcare services. This assurance service assesses healthcare effectiveness by doctors, hospitals, HMOs, and other provider alternatives.
How Do Assurance Engagements Work?
According to the Amended International Framework for Assurance Engagements, there are five components that every external assurance engagement has in common:
- A subject matter that is appropriate and agreed upon
- A third-party relationship
- Relevant criteria
- Appropriate, substantial, and sufficient evidence
- A final opinion or conclusion, which is conveyed in a written report form
These criteria are created and implemented by the International Auditing and Assurance Standards Board (IAASB).
Assurance engagements only occur when one entity needs to provide confidence in the eyes of a second party. The assurance services are then provided by a third party, which serves as an independent opinion. This perspective is only practical if all three parties understand it.
Examples of Assurance
Besides the different types of assurance services, whole life insurance is a prime example. If the policy remains active, this insurance will pay a death benefit when the insured dies (no matter how long it takes).
Shareholders also pressure company leadership to hire an external assurance firm. That way, they can have peace of mind that the accounting systems and procedures are complete and relevant.
The assurance firm will analyze the financial statements, conduct interviews with the accounting employees, and have discussions with clients and customers.
Assurance Vs. Negative Insurance
Assurance helps describe the confidence that something is valuable, complete, and accurate. After a detailed review of information and documents that are in scope, professional services confirm these positive assurance components.
Negative assurance involves the level of confidence that something is accurate, given there is no proof. For example, because there is no evidence that data is inaccurate or misinterpreted, it will be assigned as accurate.
What Is the Difference Between Audit and Assurance?
So, what is the difference between audit and assurance? It is vital to note that the audit is the first phase, and then assurance happens afterward. Audits are also performed by an external or internal auditor, while audit firms provide assurance services.
What is assurance in an internal audit? The process involves the process of evaluating specific accounting entries within the company’s financial statements.
On the other hand, assurance takes a broader scope in assessing both financial records and accounting entries. Assurance also further confirms the available documents in the entity’s accounting record, per accounting principle and standing.
Auditing and assurance services also take different angles at looking at a company’s financial data.
An audit will convey any fraud, misinterpretation, and mistakes in the funds or financial statement. Assurance focuses on analyzing and elevating the quality of a company’s information.
Conclusion
When it all comes down to it, assurance is a guaranteed coverage that provides a benefit during the future occurrence of an event. Find an accountant that provides assurance services to verify the accuracy and validity of information and documents.
Assurance will also assist companies in mitigating risks and avoiding operational and financial problems. In the end, assurance sets out to deliver peace of mind and plan for the future.