Positive assurance is a positive assertion or in other words when opinion is stated in “positive form”. On the other hand, negative assurance is simply an opinion expressed in negative wordings.
We call negative assurances negative because of the sentence structure. Sentences that contain NOT in them are called negative sentences or negation
But such negations have an important status in auditing. Let’s understand why it is different then usual negation use in our daily life.
Usually when we say, for example, This car is NOT good then it is taken as as if car is bad.
But in auditing when we say that Financial statements are NOT bad then it does not mean that financial statements are GOOD.
Therefore, in auditing we can say that we have three levels:
- Not Bad
Let’s understand the reason why we are differentiating in such detail and creating such kinds of differences that are apparently minor.
For example, you went with your friend to buy a new car. Your friend is with you as he has reasonable knowledge of few cars and can give you some advice. When you reached at the car dealer’s place you found three different cars. Car names were: Faster, Stronger and Efficient.
Now your friend’s opinion can be somewhat like the following:
- Toyota is GREAT! I have personally used it and I know about its drives and even the parts are cheaper to buy.
- Mazda is really bad! I know people complaining about its injection system and even spare parts are not easily available
- Honda is NOT bad! Even though I have not used it neither I know much about it but so far as I can examine it in this limited time it is looking good
An expression of your friend about Toyota was rock solid as he had the relevant knowledge about the car and is also speaking after having an experience and thus holds an evidence that YES IT IS GOOD. Another thing to note is that expression contains high degree of assurance as he knows about it.
An expression about Mazda was also rock solid and he knows what he is saying and has based his opinion on his experience and also have the reasons why he is saying that it is BAD. Again, the point to note in this expression is that it is full and consists of high degree of assurance.
However, as he does not have any experience with Honda, so he just went on to check it for the first time and gave a short check up to this car. Though this limited examination gave him a hint that it is not a bad car but he is still not sure whether it is completely good either. Therefore he is moderate in his opinion and his expression is not full and is not giving stronger assurance. Thus it means that this car is NOT bad but it does not mean that it is good either because he does not know about this car much.
Same goes for auditors. When auditors are conducting reasonable assurance engagement they provide positive assurance i.e. either something is GOOD or BAD. Such kinds of assurances give higher level of assurance as the expression of opinion is more straight forward and are more clear.
However, if they are conducting limited assurance engagements then because of limited scope of examination they are unable to check everything (in such detail that enable the auditors to give reasonable assurance) they provide moderate assurance and this moderate assurance comes in negative form and when they have to say that have not found anything fishy, they just say that “… nothing has come to the knowledge of the auditor that cause to believe that the financial statements are NOT prepared, in all material respects, in accordance with applicable financial reporting framework. Such assurance engagements do not give the same level of assurance as Reasonable Assurance Engagement as the expression of opinion is not that clear and straight forward as auditor was unable to carry out same level and depth of examination that would have been carried out under reasonable assurance engagement.