What Are Assurance Services and Why Do They Matter?

Assurance services are independent professional services designed to improve the quality of information for decision-makers. Performed by Certified Public Accountants (CPAs), these engagements involve an objective examination of evidence to provide a conclusion on a specific subject. The goal is to reduce information risk—the risk that information is inaccurate or misleading. This field extends beyond financial audits to cover areas from system security to operational efficiency, providing comfort to users like investors, business partners, or internal management.

The Core Objective of Assurance

The function of an assurance service is to enhance the confidence users can place in information by having an independent professional evaluate it against suitable criteria. For example, financial statements are evaluated against Generally Accepted Accounting Principles (GAAP). This process is built on two principles: independence and professional judgment. Independence requires the practitioner to be free from bias, while professional judgment involves applying relevant knowledge and experience to make informed decisions.

Common Types of Assurance Engagements

Financial Statement Audits

The most recognized form of assurance is the audit of an entity’s financial statements. This engagement provides the highest level of assurance and culminates in an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with a specified financial reporting framework. Auditors examine evidence, including internal controls, transactions, and account balances.

The professional standards they follow depend on the entity. Audits of private companies and non-profits are governed by standards from the American Institute of Certified Public Accountants (AICPA), while public company audits fall under the authority of the Public Company Accounting Oversight Board (PCAOB).

Audit procedures involve risk assessment, testing internal controls, and performing substantive testing of financial data. An auditor might physically observe inventory, confirm cash balances with a bank, or verify receivable amounts with customers. The primary users of audited financial statements are external stakeholders like investors and creditors, who use the report to assess the financial health of the entity.

Financial Statement Reviews

A review of financial statements offers a lower level of assurance than an audit and is often a cost-effective option for smaller, private companies. The scope is narrower, consisting primarily of analytical procedures and inquiries of company management. The objective is to determine if the practitioner is aware of any material modifications needed for the financial statements to conform with the applicable reporting framework.

Unlike an audit, a review does not involve testing internal controls or verifying data with third parties. The CPA analyzes financial data for unusual trends and discusses these with management. This limited assurance is often sufficient for management or lenders of smaller entities who need a basic level of comfort regarding the financial information.

Examinations of Internal Control

Beyond financial data, assurance services can focus on the effectiveness of a company’s internal controls. System and Organization Controls (SOC) reports are a common example for service organizations that handle data for other companies, such as payroll processors or cloud data providers. These reports provide assurance to customers that their data is being handled securely and reliably.

There are different types of SOC reports, focusing on controls related to security, availability, processing integrity, confidentiality, or privacy. A CPA examines the design and operating effectiveness of these controls over a period of time. The resulting report describes the service organization’s systems and the tests performed, providing information for customers’ own risk management.

Specialized Assurance Services

Practitioners now offer assurance on a wide range of specialized subject matters. This can include engagements to verify a company’s claims about its sustainability practices by providing a report on greenhouse gas emissions or other environmental metrics. Another growing area is cybersecurity risk management, where a practitioner can provide assurance that an entity has effective processes to detect and respond to cybersecurity threats.

These engagements demonstrate the flexibility of assurance services in providing trust and transparency across many different facets of a business’s operations and reporting. For example, a cybersecurity assurance engagement might use an established framework as its criteria for evaluation.

Understanding the Assurance Report

The language and structure of an assurance report are standardized to ensure clarity and consistency. This allows users to understand the nature and limitations of the engagement.

For a financial statement audit, the most common outcome is an unqualified opinion. This opinion signifies that the auditor believes the financial statements are presented fairly in all material respects. It does not mean the company is a good investment, but that the financial information is reliable.

Conversely, if the auditor encounters issues, they may issue a qualified opinion. This conclusion states that, except for a specific matter, the financial statements are presented fairly. In more severe cases, an adverse opinion is issued, stating the financials are not fairly presented, or a disclaimer of opinion is issued, stating no opinion can be expressed.