(upbeat music)
-: There are different levels of assurance.
The primary levels are reasonable assurance
and limited assurance.
Understanding the differences between these two types
of assurance is imperative
as these concepts are pervasive
throughout your study of the subject.
There are three primary differences
between reasonable assurance engagements
and limited assurance engagements.
The first relates to the level of assurance
that is provided by each engagement.
The second relates to the work effort involved
in the performance of the different engagements
and the third relates to the type of opinion
that is provided in the written assurance report.
Let's start by using a continuum to plot where reasonable
and limited assurance engagements would sit
in relation to each other.
On one end of the continuum, we have no assurance provided.
For example, where the practitioner is asked
to compile financial statements for the client,
there's no opinion provided by the practitioner
but simply a set of financial statements.
On the extreme opposite end of the continuum,
we have absolute assurance provided.
Absolute assurance basically means
that the practitioner is 100% certain.
It refers to a situation
where every single item has been tested.
In other words, the practitioner did not test
on a sample basis, but rather tested everything.
This type of engagement is extremely rare
as it is costly and time-consuming.
For example, consider an engagement
where the practitioner is required to provide an opinion
relating to the existence of vehicles owned by the client.
If there are only 12 vehicles in the fixed asset register,
and all vehicles are easily accessible,
then the practitioner is likely to test all 12
rather than choose a sample.
In this case,
the practitioner would be providing absolute assurance
relating to the existence of the vehicles.
Limited assurance engagement is a low form of assurance.
However it is still an assurance engagement.
That is, an opinion is provided by the practitioner,
relating to the subject matter
and users would be able to get some comfort
over the correctness of the subject matter,
based on the opinion provided,
albeit to a limited extent.
A common example
of a limited assurance engagement is review engagement.
Reasonable assurance engagements provide a high level
of assurance.
These engagements are closer to absolute assurance
but do not provide absolute assurance
since the practitioner tests items on a sample basis
then projects the results of the sample
over the rest of the population.
A common example of reasonable assurance engagement is audit
of financial statements.
The work effort required,
for reasonable assurance engagement
and a limited assurance engagement,
is the second major difference
between these two types of engagements.
In a limited assurance engagement,
the practitioner is required to obtain an understanding
of the entity and the business
by making general inquiries.
The practitioner will
also perform basic analytical procedures.
These analytical procedures are not substantive in nature
and do not generally require the practitioner
to obtain corroborative evidence.
In a reasonable assurance engagement,
the practitioner will
also be required to obtain an understanding
of the entity and the business
by making general inquiries.
The practitioner will also perform analytical procedures
but unlike in a limited assurance engagement,
the practitioner will be required to perform
both basic as well as substantive analytical procedures.
For example, in a limited assurance engagement,
the practitioner would rely primarily on inquiry,
whereas in a reasonable assurance engagement,
the practitioner will be required
to seek corroborative evidence.
In other words,
where basic comparative analytical procedures would suffice
in a limited assurance engagement,
a reasonable assurance engagement would require detailed
predictive analytical procedures
that can be referenced to corroborative evidence.
That is, everything needs to be proven
and referenced back to evidence
that must form part of the engagement file.
Further, a reasonable assurance engagement requires
the practitioner to perform tests of control
and substantive tests of detail.
These are generally not required
in a limited assurance engagement.
The third major difference between a reasonable
and limited assurance engagement is the type
of opinion that is provided.
In a reasonable assurance engagement,
the practitioner expresses a positive form of opinion,
while in a limited assurance engagement,
the practitioner would express a negative opinion.
For example, a positive audit opinion explicitly states
that the financials are fairly presented.
It states,
"in our opinion the financial report presents fairly,
"the financial position of the entity
"as at the entity's financial year end."
In a limited assurance engagement, such as a review,
the opinion would be stated in negative manner.
For example, it would state that,
"nothing has come to our attention
"that causes us to believe
"that the financial statements are not fairly presented".
To recap, there are two major types
of assurance engagements,
namely reasonable and limited assurance.
The major differences between these relate to the level
of assurance, the required work effort
and the type of opinion
that can be obtained from each engagement.