Negative assurance is an auditor’s determination that a particular set of facts appears accurate because no evidence to dispute them has been found. This type of assurance is typically employed when it’s not feasible to positively confirm the accuracy of financial reports.
The purpose of negative assurance is to affirm that no evidence of fraud or violations of legal accounting practices has been detected.
Key Takeaways
- Negative assurance is a confirmation from an auditor that certain facts are accurate because there is no evidence to the contrary.
- This assurance is used when positive assurance (proof of facts) isn’t applicable.
- The aim is to confirm the absence of fraud or violations.
- It does not assert the absence of illegal activity, only that no instances were found by the auditor.
Insights into Negative Assurance
Negative assurance typically comes into play when positive assurance cannot be given. Positive assurance refers to an auditor validating that financial statements provide an accurate depiction of a company’s financial condition based on evidence.
Certain audited financial reports, especially those of public companies, require positive assurance in accordance with generally accepted accounting principles (GAAP). Auditing such companies comprehensively is a significant effort, so positive assurance is issued only when strictly necessary.
Special Considerations
Negative assurance is commonly issued when an accountant is asked to review financial statements certified by another accountant. Here, because another professional has already vouched for the accuracy, negative assurance is often sufficient to indicate the statements are free of material misstatements. It’s also utilized when reviewing statements concerning the issuance of securities.
To give a negative assurance opinion, an accountant must gather evidence directly and cannot rely on third-party evidence. The audit procedures for negative assurance are not as rigorous as those for positive assurance.
It’s essential to understand that negative assurance doesn’t guarantee the non-occurrence of illegal activity; it only means no evidence of such activity was found.
Real-World Example of Negative Assurance
Consider Company ABC that hires an auditing firm to review its financials from the fiscal year 2019. The assigned auditor examines all accounting documents, including general ledgers, journals, and other financial records, though not every single entry. The auditor also interviews employees and management on specific topics.
After this examination, the auditor finds no evidence of fraud or accounting violations and issues a negative assurance that there are no detected issues, errors, or misstatements.
Understanding the Difference: Negative vs. Positive Assurance
Negative assurance indicates confidence in accuracy because no evidence suggests otherwise. In essence, if no proof exists to counter the information or indicate fraudulent practices, it is presumed accurate.
Positive assurance, on the other hand, requires proof of facts to confirm the non-existence of fraud. When positive assurance can’t be delivered, negative assurance serves as an alternative.
The Concept of Assurance in Auditing
In auditing, assurance refers to the professional opinions about the accuracy and completeness of analyzed information. For example, when an accountant assures the accuracy of financial statements, they assert that these documents have been reviewed following acceptable accounting standards and practices.
Related Terms: positive assurance, audit evidence, certified financial statements, general ledger, GAAP.
