ASSURANCE SERVICES
An assurance service is an independent professional service that improves the
quality of information for decision makers. Such services are valued because the
assurance provider is independent and perceived as being unbiased with respect to the
information examined. Individuals who are responsible for making business decisions
seek assurance services to help improve the reliability and relevance of the information
used as the basis for their decisions.
Assurance services can be done by CPAs or by a variety of other professionals. For
example, Consumers Union, a nonprofit organization, tests a wide variety of products
used by consumers and reports their evaluations of the quality of the products tested in
Consumer Reports. The organization provides the information to help consumers make
intelligent decisions about the products they buy. Many consumers consider the
information in Consumer Reports more reliable than information provided by the product
manufacturers because Consumers Union is independent of the manufacturers.
Similarly, the Better Business Bureau (BBB) online reliability program, the BBB Accredited
Business Seal, allows Web shoppers to check BBB information about a company and be
assured the company will stand behind its service. Other assurance services provided by
firms other than CPAs include the Nielsen television and Internet ratings and Arbitron
radio ratings.
The need for assurance is not new. CPAs have provided many assurance services
for years, particularly assurances about historical financial statement information. As a
result of provisions in Section 404 of the Sarbanes–Oxley Act, CPA firms provide
assurance on internal control over financial reporting for larger public companies. More
recently, CPAs have expanded the types of assurance services they perform to include
other information of interest to investors, customers, and other interested parties, such
as reports on corporate social responsibility and sustainability reports. For example,
businesses and consumers often seek assurances that companies with which they
conduct business produce products and services in a socially responsible manner. The
demand for assurance services continues to grow as shareholders and other
stakeholders seek assurances about financial and nonfinancial information in addition
to information in corporate financial reports.
One category of assurance services provided by CPAs is attestation services. An
attestation service is a type of assurance service in which the CPA firm issues a report
about a subject matter or assertion that is made by another party. Primary categories of
attestation services include:
1. Audit of historical financial statements
2. Audit of internal control over financial reporting
3. Review of historical financial statements
4. Other attestation services that may be applied to a broad range of subject
matter
Audit of Historical Financial Statements
In an audit of historical financial statements, management asserts that the
financial statements are fairly stated in accordance with applicable U.S. or international
accounting standards. An audit of these statements is a form of attestation service in
which the auditor issues a written report expressing an opinion about whether the
financial statements are fairly stated in accordance with the applicable accounting
standards. These audits are the most common assurance service provided by CPA firms.
Audits are designed to provide reasonable assurance that the financial statements
are free of material misstatements. Reasonable assurance is a high, but not absolute
level of assurance. This level of assurance is usually sufficient to meet the information
needs of financial statement users. Much of this book is about how auditors design tests
to provide this level of assurance, considering the client’s business and industry and risks
of material misstatements in the financial statements.
Audits are designed to provide reasonable assurance that the financial statements
are free of material misstatements. Reasonable assurance is a high, but not absolute
level of assurance. This level of assurance is usually sufficient to meet the information
needs of financial statement users. Much of this book is about how auditors design tests
to provide this level of assurance, considering the client’s business and industry and risks
of material misstatements in the financial statements.
Audit of Internal Control Over Financial Reporting
For an audit of internal control over financial reporting, management asserts that
internal controls have been developed and implemented following well established
criteria. Section 404 of the Sarbanes–Oxley Act requires public companies to report
management’s assessment of the effectiveness of internal control. The Act also requires
auditors for larger public companies to attest to the effectiveness of internal control over
financial reporting. This evaluation, which is integrated with the audit of the financial
statements, increases user confidence about future financial reporting, because
effective internal controls reduce the likelihood of future misstatements in the financial
statements.
Review of Historical Financial Statements
For a review of historical financial statements, management asserts that the
statements are fairly stated in accordance with accounting standards, the same as for
audits. The CPA provides a lower level of assurance for reviews of financial statements
compared to a high level for audits, therefore less evidence is needed. A review is often
adequate to meet financial statement users’ needs. It can be provided by the CPA firm at
a much lower fee than an audit because less evidence is needed. Many nonpublic
companies use this attestation option to provide limited assurance on their financial
statements without incurring the cost of an audit.
Other Attestation Services
CPAs provide numerous other attestation services. Typically, the CPA is engaged to
provide written assurance about the reliability of an assertion made by management.
Many of these services are natural extensions of the audit of historical financial
statements, as users seek independent assurances about other types of information. For
example, when a bank loans money to a company, the loan agreement may require the
company to engage a CPA to provide assurance about the company’s compliance with
the financial provisions of the loan. The company requesting the loan must assert the
loan provisions to be attested to before the CPA can accumulate the evidence needed to
issue the attestation report.
Another type of attestation involves internal controls at service organizations. Many
companies use a third-party service provider to process some of their accounting
activities, such as payroll, offsite at a separate IT service center or through cloud
computing. The service provider often engages an auditor to provide an attestation report
on the design and effectiveness of controls at the service organization. This report
provides assurance to companies that use the service provider that payroll is accurately
processed. Auditors of companies using the payroll service organization can also rely on
the attestation report by the service company’s auditor to reduce testing of payroll
activities and accounts.
CPAs also provide other assurance services that do not meet the definition of
attestation services. These assurance services differ from attestation services in that the
CPA is not required to issue a written report, and the assurance does not have to be about
the reliability of another party’s assertion about compliance with specified criteria. These
other assurance service engagements focus on improving the quality of information for
decision makers, just like attestation services.
CPA firms face a larger field of competitors in the market for other assurance
services. Audits and some types of attestation services are limited by regulation to
licensed CPAs, but the market for other forms of attestation and assurance is open to
non-CPA competitors. For example, CPAs must compete with market research firms to
assist clients in the preparation of customer surveys and in the evaluation of the reliability
and relevance of survey information. However, CPA firms have the competitive advantage
of their reputation for competence and independence.
