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Purpose and Learning Goals

This chapter introduces the concept of assurance and explains why it is a vital part of the accounting and business world. Rather than focusing on audit procedures straight away, it sets out the foundations: what assurance is, why it matters, who relies on it, and the role of professional judgement and ethics.

By the end of this chapter, you will be able to:

● Explain what assurance means and why organisations and society need it.
● Describe the benefits and limitations of assurance engagements.
● Identify the three key parties in an assurance engagement (practitioner, responsible party, intended users).
● Distinguish between reasonable assurance and limited assurance.
● Recognise the importance of professional scepticism and judgement.
● Understand how sustainability and technology are shaping the future of assurance.

1.1 What Is Assurance?

Assurance is about building confidence in information.

In simple terms:

Assurance is when an independent professional gives an opinion on whether information is reliable, so that people can trust it.

For example:

● A company prepares financial statements. Shareholders want to know whether they can rely on them. An independent auditor examines the statements and issues a report — this is audit assurance.
● A business might also want an independent check on its sustainability report, internal controls, or a business forecast. These are also forms of assurance.

Key point: Assurance is not limited to financial statements. It can apply to any subject matter where confidence in information is needed.

1.2 Why Do We Need Assurance?

Users of information (shareholders, investors, lenders, regulators, employees, the public) often cannot directly verify the information produced by management.

Assurance provides:

● ✅ Credibility – information is more likely to be trusted.
● ✅ Independence – an external view reduces the risk of bias.
● ✅ Risk reduction – users can make decisions with more confidence.
● ✅ Transparency – strengthens accountability and governance.
● ✅ Fraud deterrence – knowing information will be checked discourages misstatement.

Limitations of Assurance

● Sampling (not every transaction can be checked).
● Inherent limitations of systems.
● Evidence is persuasive, not conclusive.
● Possibility of management collusion to hide misstatements.

1.3 Elements of an Assurance Engagement

Every assurance engagement has five key elements:

1. Three parties

○ Responsible Party – prepares the subject matter (e.g. company directors).
○ Practitioner – provides the assurance (e.g. auditor).
○ Intended Users – people who rely on the opinion (e.g. shareholders).

2. Subject Matter – the information being tested (e.g. financial statements).

3. Suitable Criteria – benchmarks used for evaluation (e.g. accounting standards, governance codes).

4. Evidence – information gathered to support the conclusion.

5. Written Report – the conclusion expressed by the practitioner.

1.4 Levels of Assurance

There are two main levels of assurance:

● Reasonable Assurance – high (but not absolute) assurance.

○ Positive wording: "In our opinion, the financial statements give a true and fair view..."
○ Example: Statutory audit.

● Limited Assurance – moderate assurance.

○ Negative wording: "Nothing has come to our attention that causes us to believe..."
○ Example: Review of interim financial information.

Absolute assurance is impossible due to limitations of systems, judgement, and sampling.

1.5 The Expectation Gap

The expectation gap is the difference between what users think auditors/assurance providers do, and what they actually do.

Common misunderstandings include:

● Believing auditors check 100% of transactions.
● Thinking auditors guarantee the company's future success.
● Expecting auditors to detect all fraud.

Managing this gap is a challenge for the profession — communication and transparency are essential.

1.6 Planning, Risk and Materiality

Before starting an assurance engagement, practitioners must:

● Understand the business and its environment.
● Assess risks (including fraud risk and ESG*-related risks).
● Set materiality thresholds (what matters enough to influence users).
● Design procedures to address the most important areas.

ESG stands for Environmental, Social and Governance.

● Environmental – how the organisation impacts and is impacted by the natural environment (e.g. carbon emissions, climate change risks, energy use).
● Social – how the organisation manages relationships with employees, suppliers, customers, and communities (e.g. labour practices, diversity, human rights).
● Governance – how the organisation is directed and controlled (e.g. board structure, executive pay, shareholder rights, internal controls).

Why this matters for assurance: ESG issues can create significant business risks (such as asset impairments, regulatory fines, reputational damage, or disclosure obligations). Practitioners must factor these into risk assessment and materiality decisions when planning the engagement. For example, climate risks may affect the valuation of assets, while governance weaknesses may raise concerns about management integrity.

1.7 Professional Scepticism and Judgement

Two essential qualities in assurance:

● Professional scepticism – a questioning mind, not accepting evidence at face value, alert to possible misstatements.

● Professional judgement – applying experience, ethics, and reasoning when making decisions.

Without these, assurance loses its value.

1.8 Assurance in a Changing World

Modern assurance is expanding beyond traditional audits:

● Technology – use of data analytics, AI, and cloud systems to test large datasets.
● Sustainability & ESG – growing demand for assurance over non-financial information.
● Cybersecurity – IT controls and data protection are increasingly under scrutiny.

This reflects the wider role of accountants in supporting trust in business and society.

Test Your Understanding – Quick Check

1. Who are the three parties in an assurance engagement?
2. Why can absolute assurance never be given?
3. What is the difference between reasonable and limited assurance?
4. Give one example of assurance outside of a financial audit.