Negative Assurance

Refers to an auditor's conclusion that a certain set of facts are regarded to be true

Author: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:September 30, 2023

What Is Negative Assurance?

Negative assurance refers to an auditor's conclusion that a certain set of facts are regarded to be true since no contradictory information has been uncovered to cast doubt on them.

When it is not able to definitively certify the correctness of financial reporting, auditors typically employ this assurance. It is to verify that there is no proof of fraud or that any lawful accounting procedures have been broken.

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 not appropriate.

it is used to verify that no fraud or breaches have been discovered. Also, it does not imply that there was no unlawful behavior; rather, it indicates that the auditor was unable to uncover any evidence of it. 

In the absence of positive certainty, this type of assurance frequently occurs. 

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.

For certain publicly traded corporations that disclosed audited financial reports, positive confidence is necessary. 

Understanding Negative Assurance

Negative assurance in auditing indicates that while auditors found no evidence of illegal activity, it doesn't guarantee absence of wrongdoing, merely that no evidence was uncovered.

A positive assurance is often only given when legally necessary because properly auditing a public business in conformity with generally accepted accounting standards (GAAP) is a significant task.

When an accountant is asked to verify certified financial statements created by another accountant, this assurance is most frequently given. In this instance, it is frequently considered adequate to affirm that the statements are free of major misstatements. 

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.

it is crucial to note, that this does not imply that there was no unlawful behavior; rather, it indicates that the auditor was unable to uncover any instances of illegal activity.

Negative Assurance vs. Positive Assurance

The difference between the negative and positive assurance are:

Positive vs Negative Assurance
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.

 

The word "audit" refers to a review or inquiry. But in reality, it is much more. An audit is a procedure by which impartial auditors evaluate a subject. Financial statements are typically included in this topic.

In the course of the audit, auditors gather audit evidence and assess the financial statements using several criteria. An audit engagement's main goal is for the auditors to conclude. 

This judgment sums up how the topic stacks up against the relevant standards that have been determined to be appropriate. Auditors then offer their assessment based on this finding. The audit report reflects this perspective and offers comfort. Typically, it comes with a guarantee.

But occasionally, auditors could also offer a negative assurance. An adverse assurance does not imply that the financial statements do not satisfy the requirements. 

It differs from a positive assurance, though. Understanding the different sorts of assurance engagements is important before figuring out how they differ.

The distinction between positive and negative certainty may be easily seen from the information provided. Below are a few of the most significant distinctions.

1) Wording

The phrase is the main distinction between negative and positive assurance. As already stated, positive assurance services utilize a concluding sentence that is complimentary.

Negative assurance services, on the other hand, offer an opinion with a disapproving conclusion. It does not, however, communicate a negative message or viewpoint.

2) Statement

The statement offered in the two assurance services also varies due to the terminology utilized. In a positive assurance statement, auditors affirm that, in their judgment, the subject matter complies with the necessary standards. 

The negative assurance, however, states that auditors did not find any evidence that suggests otherwise.

3) Assurance Level

Users of the subject matter receive a better level of assurance from positive assurance services. These offerings, on the other hand, provide users with less trust. 

The hazards involved and the volume of audit work are also related to this variation. Positive assurance often needs more steps than negative assurance.

4) Usage

As already noted, reasonable assurance engagements include positive assurance. Users typically want more certainty from these engagements. As a result, they mandate the use of positive assurance by auditors. 

Limited assurance engagements are related to negative assurance. Auditors utilize a disingenuous conclusion since there is less confidence necessary.

Comfort Letters and negative assurance

A comfort letter is delivered by an issuer’s independent accountants to the underwriters or initial purchasers that provide certain assurances with respect to 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). 

To replace AU Section 634 of the PCAOB, which had previously codified the earlier Statements on Auditing Standards No. 72 (SAS 72) released by the American Institute of Certified Public Accountants, AS 6101 was created (AICPA).

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 and other parties in an SEC-registered offering who have a statutory due diligence defense under Section 11 of the Securities Act, such as an agent for a registered medium-term note program. 

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 delivers a signed SAS 72 representation letter, accountants may issue a comfort letter to that broker-dealer or financial intermediary in an exempt offering (such as a Rule 144A or a Regulation S offering).

The broker-dealer or financial intermediary states in such a letter that the due diligence performed in connection with the offering is essentially 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 nature of the transaction and inform the auditors in advance about the comfort letter's coverage, timeliness, and logistics. Capital market transactions happen in a variety of forms, sizes, and execution times.

A smart lawyer always makes plans in advance, communicates expectations and goals clearly, and then 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 right away and go forward at a rapid clip.

Who Issues Negative Assurance?

This written statement is frequently issued by auditors or accountants (Certified Public Accountants (CPA) 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.

This assurance is analogous to having a certified third party verify the financial statements twice before giving their judgment on them. 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 it. The audit does not entirely adhere to generally accepted accounting principles because the auditor is only hired to evaluate and not to compile Books of Accounts (GAAP).

As a consequence, in this case, the release of this document is beneficial. The annual accounts include a written statement from the auditor in an appendix. 

When an external auditor or accountant examines and reviews the work of another auditor or accountant and does not discover sufficient proof of the misconduct, this assurance is issued. 

Additionally, because the auditor only confirms a few things, the examination's scope is relatively limited in this case. As a consequence, the auditor releases this written document even though he or she is not completely confident in the organization.

This material is frequently released to the general public outside. It is made public before its securities are issued.

Therefore, the issuance might be for internal or external objectives. It is implied by the negative assurance 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 a wide range of consequences and interpretations in the accounting world. It indicates that the auditors have not thoroughly examined or studied the company's financial accounts if more of these negations are given as a reason. 

Because the account has previously examined the financial statements, acting as a second cross-check, this written declaration is frequently more than enough. It demonstrates that there are no significant inaccuracies in the books of accounts.

What Does Negative Assurance Mean in Audit?

When financial data is utilized for the issue of stocks and bonds, investment bankers and the SEC typically get this kind of guarantee. 

Additionally, anytime a CPA is requested to comment on financial statements for which an earlier Audit Opinion has been issued, the same guarantee is provided.

For the fundamental financial accounts on which a certifying audit has been conducted, this sort of assurance is unsuitable. In review engagements, which are comparable to audits but offer a lower level of service, negative assurance is also given.

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.

Because the auditor did not examine following generally accepted auditing standards, this type of assurance is provided (GAAS).

This assurance should not be used until the CPA has examined compliance with GAAS for the preceding accounting period. This is necessary because the auditor requires proof that the comfort letter protocols were followed.

The evidence must have been acquired by the CPA providing the assurance, and not by another CPA, for the assurance to be acceptable.

This assurance is also employed in contemporary legal practice since it may be used to build a "due diligence" defense. The provision of this assurance is made in the form of a letter and is specifically used in combination with another document. 

The letter is typically used by the attorney to establish two fundamental facts regarding the contested document. That the council has reviewed the relevant material and that the correctness, thoroughness, and fairness of the document are not subject to the council's responsibility. 

It is frequently used by third parties and underwriters to avoid responsibility charges, even if it is not regarded as a legal opinion.

Researched and authored by Fatemah Kamali | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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