What is the objective of an assurance engagement?

Well objective of every assurance engagement can be understood if we understand the elements of an assurance engagement. So let’s first of all understand the connection between three parties and what each do.

Stakeholders like owner, employees, creditors, lenders and many other need financial information regarding financial performance and financial position of the business for many of the economic decisions they make regarding the entity. Provision of accurate financial information to these users is the responsibility of the management of the same entity.

Now, story would have ended just right here if management always provide us with true and fair financial statements of the business. But management is also a stakeholder in the business but the nature of stake is a bit different. Management is basically responsible to manage the company in such a way that wealth of the owners is maximized which in simple words mean maximizing profitability. If for some reason business is not making profit then it means management and their policies have failed and if the same picture is painted in the financial statements then it is possible that current members of management team are replaced.

In such circumstances, when nothing is possible to be done to make owners happy, then management might be motivated to provide false information in the financial statements that shows everything is just fine and is going in favour of the stakeholders.

This is a huge blow to the reliability of financial statements and stakeholders might be worried about the status of financial information in such financial statements.

Therefore they need someone who can provide them assurance that financial statements are reliable and are usable.

This is what auditors do. They provide assurance to the users whether financial statements give true and fair view of the business or not. Auditor provides this assurance by expressing his opinion which in turn is provided by conducting assurance engagement.

Summing up everything together we can understand that the opinion increases the credibility of financial statements.

However, this is NOT the objective of assurance engagement i.e. to attach credibility to financial statements but it certainly is a derived benefit.

Objective of assurance engagement is basically to reduce engagement risk to an acceptably low level so that risk of giving an inappropriate opinion is also reduced. Even though the assurance engagements are of two kinds but the objective under both the types is the same with the difference of extent to which engagement risks are lowered.

Under reasonable assurance engagements (audits) the objective is to reduce the audit risk to such level, in context of circumstances surrounding such engagement, that opinion can be expressed in positive form. On the other hand, under limited assurance engagements (reviews) the objective is the reduce the audit risk to such level that is appropriate in circumstances to express an opinion in negative form.

In short, assurance engagement’s objective is to lower engagement risk to an acceptably low level and not to increase the credibility of the financial statements. But we cannot rule out that one of the benefits of having an independent auditor’s opinion on financial statements is to attach the credibility to the set of financial statements.

Recommended reading:

  1. What is an Assurance engagement?

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  1. SAve FRom ACute business clgoele its totally fraud faculty wastage of time and mOney.even this clgoele doesnt shows FACulty s EDucation nd experience of teaching B CAREFULL ACCA , FIa , CIMA students.

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