What Is Assurance in Accounting? (With Components and Types)

By Indeed Editorial Team

Published May 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Assurance is a specialized accounting service that certified professionals provide to verify the accuracy of financial information. Chartered accountants and certified public accountants (CPAs) are among the professionals that offer this service when reviewing financial documents and transactions. Understanding assurance services can help you ensure the validity of your accounting services, improve the quality of your decisions, and reduce the risks relating to financial information.

In this article, we answer the question, "What is assurance in accounting?", outline the components that make up this service, highlight the various types of assurance services, and discuss the relationship between assurance and auditing.

What is assurance in accounting?

If you're interested in an accounting career, you may wonder, "What is assurance in accounting?" It's an independent professional service you can apply to review the contents of financial documents to assess their validity and accuracy. It involves various applications, such as risk assessments, business performance, and information systems reliability.

In its versatile application, the service is a reliable means of ensuring a financial system operates optimally. The service can involve reviewing an accounting department's accounting statements or past data from fiscal quarters to ensure that information is accurate and up to date.

You can perform this function for businesses that require them to fulfill legal requirements or those who request them for voluntary purposes. Customers can also request assurance services to resolve complex situations, make better decisions, analyze risks, and determine the potential benefits of a business relationship. You can also render this service to non-financial departments to improve their performances, such as IT departments. Improving your knowledge of this service can help you improve clients' performance, growth, and competitiveness.

Related: What Is a Fiscal Year (FY) and Why Is It Important?

Components of assurance

Here are some elements that constitute assurance services:

  • Subject matter: The subject matter is what the assurance aims to evaluate or review. The subject matter of an assurance service usually takes the form of a balance sheet, statement of cash flow, or income statements.

  • Benchmark criteria: The essence of an assurance system relies on some criteria or indicators that professionals look out for when assessing growth, decline, or safety. An instance of such criteria is the International Financial Reporting Standards which serve as a benchmark you can use in your assurance services.

  • Criterial evidence: By identifying the criteria you want to apply in conducting an assurance service, you can determine the accuracy of a system by highlighting the presence or absence of such criteria. Where an information system contains the criteria you have decided on, you can say it's highly accurate because certain criteria are evident.

  • Assurance report: This is the comprehensive report you offer after conducting the assurance service. It usually contains the service components, outlines, procedures, criteria, and conclusion on a financial document.

  • Third-party relationship: This relationship recognizes the parties you consider when completing assurance services. The results of assurance usually affect these parties, and they include the party that prepares the financial information and those who base their decisions on the report.

Types of assurance

As a professional accountant, you can offer a wide range of assurance services, including:

Risk assessment

Various services help businesses and individuals evaluate the risks of new business opportunities, diversification into new industries, or mergers and acquisitions. Applying your understanding of assurance in accounting is a way to determine a full risk profile. With a risk profile, you can help clients make informed decisions as they recognize potential risks and put systems in place to avoid or mitigate them.

This aspect of assurance services constitutes a specialized application known as risk assurance. Risk assurance involves various methods and practices for analyzing and reviewing risk-prone factors and scenarios. This application of assurance also offers services and practices, such as compliance reviews and internal audits.

Risk assurance usually involves defining principal objectives, principal risks, analyzing key control, considering the implication of control assurance mechanisms, assurance assessments, and risk management for internal audits.

Related: How to Conduct a Risk Assessment (Tips and Definition)

Information system reliability

The presence of information is both essential and abundant in finance and other modern industries. The abundance of information can be overwhelming for businesses making efforts to act responsibly. You can apply assurances services to validate the reliability of information systems so that clients can base their decisions on the best available information.

This application of assurance services extends to non-financial departments, including a business's internal information system. In financial and non-financial departments, reliable information is vital to efficient operations.

The application of assurance services to information system reliability requires a great amount of flexibility. Sources can change frequently, making what was reliable and sound for financial decisions a fiscal quarter ago unreliable in the future. It's important to address these changes and ensure you check for reliability regularly.

Business performance measurement

The assurance criteria available in assurance services provide a more elaborate way of determining a business's performance. Stakeholders and customers usually seek a comparative and in-depth analysis of the status of various businesses and investments. As an accounting professional, you can use your understanding of assurance services to develop and combine key performance indicators and metrics to track a business's performance with them.

By applying assurances services to business performance, you can offer a business a more expansive view of its growth, performance, and profitability. Assurance services also allow you to evaluate the performance of various departments within the business with significant efficiency because you don't require individual reports. You can combine various metrics in your analysis, including business cash flow, cost base, liquidity ratio, customer loyalty, contribution per employee, SWOT, and financial leverage.

Related: How to Define and Measure a Key Performance Indicator

Health care performance measurement

This is one of the dynamic applications of assurance services that helps you evaluate the performance of health care service providers. These measurements use aggregated, analyzed, and quantified data derived from healthcare activity. You can offer this service to clients in the health care industry who want to ensure their compliance with regulatory standards. Offering quality assurance services in this industry usually involves medical staff, physicians, and third parties, like government institutions.

This application of assurance services also helps clients who want to make better decisions concerning their health care providers. It can also provide an accurate picture of the state of health care services and inform the developments, changes, and recommendations in healthcare policy. With the wide range of metrics you can consider when applying assurance services in this industry, it can be difficult to choose.

Some of the important metrics in health care performance measurements include the length of stay, readmission rates, patient satisfaction, mortality rate, bed utilization rate, and side effects of hospital procedures.

Electronic commerce

By applying assurance services to businesses with electronic commerce outlets, you can assure customers of a client's, establishment's, or organization's integrity, security, privacy, and reliability. To improve the trust customers have in e-commerce platforms, you can address features like the security of financial information, such as passwords and credit card information.

You can also offer your assurance expertise to organizations that specialize in developing web assurance services. This dynamic application of assurance services grows with digital trends and incorporates cybersecurity measures and policies that combat attempts to compromise electronic commerce transactions. You can develop your methods by keeping up with recent developments and obtaining comprehensive information on reporting requirements among users of e-commerce platforms.

Relationship between assurance and audit

While assurance and auditing are different fiscal processes, some relationships exist between them, including:

Similarities between assurance and audit

Auditing focuses on reviewing finances to ensure there are no fraudulent practices or financial misrepresentations. You can trace the cash flow or examine department ledgers to identify irregularities when conducting an audit. In this way, auditing is similar to assurance processes because it also ensures the reliability of a financial system.

The similarities between these two processes become evident in the expansive nature of assurance services that incorporate auditing methods. For instance, assurance services evaluate processes, statements, operations, and procedures, while adults focus on evaluating financial statements.

Related: Accountant vs. Auditor: Differences and Similarities

Difference between assurance and audit

There are various differences between assurance services and audits, including their scopes, processes, liabilities, and available resources. Audits aim to identify the presence of financial mismanagement by applying ethical accounting standards, while assurances aim to evaluate the accuracy of accounting information, highlight inconsistencies, and identify misinterpretations.

Audits also attract a significant level of liability because of the access it requires to financial information. In contrast, the limit of assurance services to specific departments reduces the accompanying rights and liabilities.

Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.

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