Negative Assurance
Refers to an auditor's conclusion that certain facts are true since no contradictory information has been uncovered to cast doubt on them
What Is Negative Assurance?
Negative assurance refers to an auditor's conclusion that certain facts are true since no contradictory information has been uncovered to cast doubt on them.
When they cannot definitively certify the correctness of financial reporting, auditors typically employ this assurance. It simply states that no contradictory evidence has been found to cast doubt on the facts.
An auditor's affirmation that certain facts are true because there is no proof to the contrary is known as negative assurance. It is employed when positive assurance (the demonstration of facts) is inappropriate.
It states that the auditor has not discovered evidence of fraud or breaches. This does not imply that unlawful behavior did not occur; rather, it indicates that the auditor could not uncover any evidence of it.
An auditor's assertion that a company's financial statements give an accurate picture of its real financial status based on evidence is said to have positive assurance of correctness, which is seen as being stronger.
Positive confidence is necessary for certain publicly traded corporations that disclose audited financial reports.
Key Takeaways
- Negative assurance is a conclusion by auditors that certain facts are true since no contradictory evidence has been found to cast doubt on them.
- It is used when auditors cannot definitively certify the correctness of financial reporting, indicating that while no evidence of wrongdoing has been uncovered, it does not guarantee the absence of illegal activity.
- Unlike positive assurance, which provides a high level of certainty about the accuracy of financial statements, negative assurance is more limited and does not offer a guarantee.
- Negative assurance is typically provided by auditors or accountants in review engagements or when commenting on previously audited financial statements.
- It is often included in comfort letters provided to underwriters or initial purchasers in securities offerings, and it may also be used in legal practice to establish a "due diligence" defense.
Understanding Negative Assurance
Negative assurance in auditing indicates that while auditors found no evidence of illegal activity, it doesn't guarantee the absence of wrongdoing; it merely indicates that no evidence was uncovered.
Positive assurance is provided when the auditor can give a high level of assurance about the accuracy of the financial statements, regardless of legal requirements.
When an accountant is asked to analyze the financial records related to the issuing of securities, positive assurance opinions are more commonly given. In this instance, affirming that the statements are free of major misstatements is frequently considered adequate.
This is because another accountant has previously validated the correctness of the statements. When an accountant is asked to analyze the financial records related to the issuing of securities, negative assurance opinions are also given.
The accountant must collect audit evidence directly and cannot depend on indirect evidence, that is evidence given by a third party to deliver a conclusion. Less rigorous methods are employed in the creation of a negative assurance opinion than are needed to create a positive assurance opinion.
Note
It is crucial to note that this does not imply that there was no unlawful behavior; rather, it indicates that the auditor could not uncover any instances of illegal activity.
Negative Assurance vs. Positive Assurance
The difference between the negative and positive assurance are:
| Positive Assurance | Negative Assurance |
|---|---|
| It is a credible guarantee. | Compared to reasonable assurance, it is a restricted assurance, which is a lesser level of certainty. |
| Typically applied in audit engagements | And frequently employed in review engagements |
| Auditors provide an opinion on several topics | Auditors and professionals do not offer opinions on specific topics. |
| In reports, this is typically stated as "In our view" | Usually stated as "nothing has come to our knowledge" in the report. |
| The danger is decreased to a manageable level. | Reduced to a level of moderate risk |
| Auditors must gather enough relevant evidence to create a foundation for an opinion. | Only subject topics need to be reviewed by auditors or practitioners. |
Comfort Letters and negative assurance
An issuer's independent accountants deliver a comfort letter to the underwriters or initial purchasers that provide certain assurances concerning the financial information included in a registration statement, prospectus, or offering memorandum used for a securities offering.
1. Review AS 6101 and Relevant Comfort Letter Precedents
Learning about Auditing Standards No. 6101: Letters for Underwriters and Certain Other Requesting Parties (AS 6101) published by the Public Company Accounting Oversight Board is the first order of business (PCAOB).
AS 6101 was created by the Public Company Accounting Oversight Board (PCAOB) to replace the earlier Statements on Auditing Standards No. 72 (SAS 72). Although AS 6101 is the most recent version of the pertinent U.S.
2. Obtain a SAS 72 Rep Letter for Unregistered Offerings and Coordinate with Auditors Regarding Any Needed Preliminaries
Accountants may provide a comfort letter to named underwriters or initial purchasers in an SEC-registered offering to provide financial information assurance.
In the second scenario, the seeking party must provide the accountants with either a SAS 72 representation letter, as detailed below, or an opinion from counsel stating that the party has a due diligence defense under Section 11 of the Securities Act.
If a broker-dealer or other financial intermediary participates in an exempt offering (such as a Rule 144A or a Regulation S offering), accountants may issue a comfort letter based on other factors besides receiving an SAS 72 representation letter.
In such a letter, the broker-dealer or financial intermediary states that the due diligence performed in connection with the offering is equivalent to the diligence that would have been performed in connection with acting as an underwriter in an SEC-registered offering.
3. Plan Ahead
Be cognizant of the transaction's nature and inform the auditors about the comfort letter's coverage, timeliness, and logistics. Capital market transactions come in various forms, sizes, and execution times.
Note
A smart lawyer makes plans in advance, communicates expectations and goals clearly, and follows through.
Recognize that shelf takedown of the following, such as investment-grade debt offerings, might go to market fast; as a result, the process for obtaining a comfort letter must start immediately and proceed rapidly.
Who Issues Negative Assurance?
This written statement is frequently issued by auditors or accountants (Certified Public Accountants (CPAs) in the USA), who only review already-prepared financial accounts. Usually, this is not issued by the accountant who had compiled the books of accounts.
Negative assurance is not analogous to having a certified third party verify financial statements twice; instead, it indicates that the auditor hasn't found any evidence to contradict the facts presented in the financial statements.
In this case, the External Auditor or Accountant cannot depend on circumstantial evidence from third parties.
They gather and double-check a few proofs before issuing the audit. The audit is conducted by Generally Accepted Auditing Standards (GAAS), and auditors are hired to express an opinion on whether financial statements are presented fairly.
As a consequence, the release of this document is beneficial in this case. The annual accounts include a written statement from the auditor in an appendix.
This assurance is issued when an external auditor or accountant examines and reviews another auditor or accountant's work and does not discover sufficient proof of misconduct.
Note
The scope of an audit is determined by the auditor's judgment of risk and materiality rather than solely by the confirmation level. Consequently, the auditor releases this written document even though they are not completely confident in the organization.
Negative assurance is typically provided to the entity's management or those charged with governance and is not released to the general public. It's not necessarily released before securities are issued.
Therefore, the issuance might be for internal or external objectives. The negative assurance implies that the financial statements are of a mild type. Although they are neither excellent nor terrible, they appear to be in a favorable situation.
Assurance connotations have many consequences and interpretations in the accounting world. If more of these negations are given as a reason, it indicates that the auditors have not thoroughly examined the company's financial accounts.
This written declaration is frequently more than enough because the account has previously examined the financial statements, acting as a second cross-check. It demonstrates that there are no significant inaccuracies in the books of accounts.
What Does Negative Assurance Mean in Audit?
When financial data is used to issue stocks and bonds, investment bankers and the SEC typically receive this guarantee.
Additionally, negative assurance is provided when a CPA is requested to comment on financial statements for which an earlier Audit Opinion has been issued, typically in review engagements.
This assurance is unsuitable for the fundamental financial accounts on which a certifying audit has been conducted. Negative assurance is also given in review engagements, which are comparable to audits but offer a lower level of service.
On unaudited financial statements and subsequent changes, assurance comments are made, indicating that nothing came to the auditor's attention that might suggest the statements don't adhere to applicable accounting requirements and aren't fairly presented.
This type of assurance is provided when the auditor has performed procedures by generally accepted auditing standards (GAAS) and has not found any material misstatements.
This assurance should not be used until the CPA has examined compliance with GAAS for the preceding accounting period. The auditor requires proof that the comfort letter protocols were followed.
Note
Another CPA can acquire the evidence and still be acceptable for providing negative assurance as long as the CPA providing the assurance evaluates and relies on that evidence.
This assurance is also employed in contemporary legal practice since it may be used to build a "due diligence" defense. This assurance is made in the form of a letter and is specifically used in combination with another document.
The attorney typically uses the letter to establish two fundamental facts regarding the contested document. The council has reviewed the relevant material, and the document's correctness, thoroughness, and fairness are not subject to the council's responsibility.
It is frequently used by third parties and underwriters to avoid responsibility charges. It is often regarded as a legal opinion, especially when provided in the context of a comfort letter.
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