What are Assurance Services in Auditing?

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  • 0:04 Assurance Services
  • 0:42 Types
  • 1:31 Example
  • 4:04 Assurance Service Providers
  • 4:57 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

When an auditor completes a review of financial statements or performs a regulatory audit, they are offering assurance services. In this lesson, we'll define assurance services and discuss why they are such an important part of what an auditor does.

Assurance Services

When most people think of what an auditor does, they think about assurance services. Assurance services are audit activities that provide an independent, objective assessment of financial statements or compliance efforts. The objectives of these audits are to assure management, the Board, and regulators that financial statements are accurate and operations are done in accordance with applicable policies and regulations. These compliance, regulatory, and financial statement audits are all considered assurance services. Other audit services, such as consulting and advisory audits - while important audit activities - are not part of the assurance audit service.

Types

Regulatory and compliance audits are types of assurance services. They essentially do the same thing - ensure that an organization's operations are following guidelines and rules set forth in either legislation or policy. Regulatory audits are those that test compliance with laws and regulations, while compliance audits are those that test against policies.

The most common example of assurance services are financial statement audits. According to the regulation known as the Sarbanes-Oxley Act of 2002, U.S. companies that are publicly traded on the stock exchange must have their quarterly and annual financial statements audited by an independent, external public accounting firm.

When a public accounting firm audits financial statements, they are making sure every number on the statements is accurate. They do this by testing transactions that make up each account. Let's look at a quick example.

Example

ToyMaker, Inc. is the manufacturer of…well, toys. They are having a quarterly financial statement audit. Today, Melissa, an auditor, is testing the sales account on the income statement. So, how would she make sure the amounts reported - let's say $28 million in sales - are correct? Good question.

To validate the $28 million sales figure, Melissa needs to make sure that sales totaling $28 million actually occurred for the amount recorded. She would start with the income statement report of $28 million in sales. Where did those sales come from? Supporting documentation will break those sales down by location, product, or perhaps, some other category ToyMaker has identified.

Let's assume they use location. ToyMaker reports $15 million in sales from a store downtown and $13 million from a store in suburbia. Since those amounts are close together, the auditor decides to divide the sample of 30 evenly between the two locations, selecting 15 transactions from each location. Since this is a quarterly audit and these sales were made over three months, Melissa decides to sample five transactions from each month.

Melissa will use the sample monthly transactions to determine the daily total of sales. One day, sales might total $139,000, while another day may have a total of $256,000. Each of those days has a number of transactions. Whatever selection method she decides to use, Melissa will end up with 30 transactions; five transactions from each of the three months, at each of the two locations.

Then what? Well, she gathers documentation to make sure those 30 transactions are accurate. Every time ToyMaker sells a product, three things should happen. First, they'll generate an invoice to the buyer. Second, there will be a packing slip or inventory document that records the product being shipped. Third, the customer will pay.

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