Positive / Negative

[Acid]

Hi

What is exactly the difference between a reasonable audit assurance and limited assurance . What does it mean by one report is positive while other is negative?

Thanks

Acid

[Vanessa]

Answer

1. Reasonable assurance

In a reasonable assurance engagement, the practitioner:
 gathers sufficient appropriate evidence,
 concludes that the subject matter conforms with the relevant criteria and
 that the level of risk is exceptionally low and
 expresses the conclusion in a positive form

Example

The audit report of Black Co includes the following statements:
 The financial statements have been prepared in accordance with the relevant accounting standards.
 In our opinion, internal control is effective in all material respects, based on levels fixed by the company.
These statements show that this is a reasonable assurance engagement.

This kind of report is a positive report since the auditor gives an assertive assurance about the financial statements.

2. Limited assurance

In a limited assurance engagement, the practitioner:
 gathers sufficient appropriate evidence,
 ensures that the subject matter conforms with the relevant criteria
 to a level of risk that is acceptable in the circumstances of the engagement, (but where the risk is higher than for a reasonable assurance engagement) and
 expresses the opinion in a negative form.

Example

A retail business that produces its own financial statements but retains a practitioner for tax returns and other accounting advice is planning to open a new store. To do so, it needs to increase its existing lending facility and approach its bank with a proposal for additional funding. The bank, which has been receiving quarterly financial statements, looks very closely at the business’s current financial position. It requests that the most recent financial statements be audited. The business owner is unhappy with the cost of a full audit.

Although the bank is satisfied with the client’s financial position on the basis of its financial statements, before agreeing to increase the lending facility, the bank manager needs greater assurance that the financial statements are reasonably accurate.

The practitioner proposes a limited assurance engagement that looks at the financial statements overall but at a lower cost. The result is that the bank is happy with the focussed nature of the review and the level of assurance on the financial statements, and provides the additional funding. The business owner is also happy with the cost, which is lower than the full audit alternative. Hence, the practitioner has been able to suggest a review engagement, which is a practical and a cost effective solution to the conflicting demands of the bank and the client.

This form of assurance engagement gives a level of limited assurance that is proportional to the extent of the given circumstances. The assurance in this case is not assertive, hence called a negative assurance. The following example shows the method by which the assurance is given.

Example

The audit report of White Co includes the following statements:
 Based on the work as described in this report, nothing has come to our attention that causes us to believe that the financial statements are not prepared in accordance to the accounting standards.
 Further, nothing has come to our notice that causes us to believe that internal control is not effective, based on the levels set by the company.

[Acid]

That means that in limited assurance , the auditor only examines the required thing with the relevant criteria but infact its not a complete audit of all financial statement but rather a audit of specific area?

[Acid]

That means that in limited assurance , the auditor only examines the required thing with the relevant criteria but infact its not a complete audit of all financial statement but rather a audit of specific area?

:confused:

[Vanessa]

That's right