Title: What Is Negative Assurance? A Practical Guide for Accountants, Companies, and Users
Key takeaways
– Negative assurance is a limited level of assurance in which an auditor states that, based on limited procedures, nothing came to their attention to indicate that financial information is materially misstated.
– It is weaker than positive assurance (an audit opinion) and does not prove the absence of errors, misstatements, or fraud.
– Negative assurance commonly arises in review engagements, prospectus comfort letters, and other situations where a full audit is not required or practical.
– Both issuers and users must understand the scope, procedures performed, and limitations before relying on negative assurance.
What is negative assurance?
Negative assurance is an auditor’s conclusion that, after performing limited procedures, they have not become aware of any information that would indicate material misstatements or irregularities in the subject matter. In plain terms: because the auditor did not find contrary evidence in their review, the information is treated as not materially misstated — but the auditor is not saying they proved it correct.
How negative assurance is used (high-level)
– Review engagements of financial statements: a typical form of limited assurance where the accountant performs inquiry and analytical procedures rather than extensive testing.
– Comfort letters for securities offerings: accountants often provide negative assurance on interim financial information in offering documents.
– Peer reviews or secondary reviews: when one accountant reviews statements prepared or audited by another accountant, a negative assurance opinion may be seen as sufficient.
Why negative assurance is different from positive assurance
– Positive assurance (an audit opinion) states that, based on extensive audit procedures, the financial statements present fairly, in all material respects, in accordance with applicable accounting standards. It requires substantial testing and evidence.
– Negative assurance states that nothing came to the accountant’s attention to indicate material misstatement. The procedures are less extensive and do not provide the same level of confidence as an audit opinion.
Limitations and special considerations
– Negative assurance is not a guarantee of correctness or an assertion that fraud or illegal acts did not occur; it reflects results from limited procedures.
– The confidence level is lower than with an audit. Users with high reliance needs (creditors, public regulators) often require a positive assurance (audit).
– Scope must be clearly defined in the engagement letter and in the report wording so users understand what was and was not examined.
– Standards and customary wording vary by jurisdiction and engagement type. Common practice for reviews in the U.S. follows AICPA guidance (SSARS and other applicable standards) and specific requirements for comfort letters in securities offerings and regulatory contexts.
Practical steps for accountants issuing negative assurance
1. Agree the scope and objective in writing:
– Prepare an engagement letter that defines the subject matter (e.g., interim financial statements), the procedures to be performed, the level of assurance (negative), and the intended users.
2. Plan the limited engagement:
– Identify key accounts, risk areas, and materiality thresholds relevant to the limited procedures.
3. Perform appropriate limited procedures:
– Inquiry of management and others within the organization.
– Analytical procedures (trend and ratio analysis) to identify unusual fluctuations.
– Limited, targeted tests of transactions or balances where indicated.
– Obtain management representations when appropriate.
– Corroborate responses where feasible (e.g., inspect supporting documents, perform basic recalculations).
4. Evaluate results and determine whether anything came to attention:
– Assess whether identified issues, if any, indicate a material misstatement.
5. Draft the report with appropriate negative-assurance wording:
– Use wording consistent with applicable standards (e.g., typical review language includes phrases such as “Based on our review, we are not aware of any material modifications that should be made…“).
– Clearly state scope, procedures performed, and the nature of the assurance (limited/negative).
6. Document the engagement thoroughly:
– Keep workpapers showing the procedures performed, evidence obtained, and rationale for the conclusion.
Practical steps for companies requesting negative assurance
1. Clarify purpose and users:
– Decide why negative assurance is needed (e.g., securities offering, lender requirement, peer review) and who will rely on it.
2. Define scope and deliverables:
– Agree the specific financial periods, accounts, and any excluded items in the engagement letter.
3. Provide timely, organized support:
– Prepare supporting schedules, reconciliations, and access to staff to facilitate efficient procedures.
4. Consider whether a review or full audit is more appropriate:
– If users require higher assurance, be prepared to pursue a positive assurance audit instead.
Practical steps for users (investors, lenders, other stakeholders) evaluating negative assurance
1. Check who issued the opinion and their independence and qualifications.
2. Read the engagement letter or report carefully to understand scope, procedures performed, and limitations.
3. Note the subject matter and period covered (interim vs. full-year, selected accounts vs. entire statements).
4. Assess whether the level of assurance matches your needs:
– For material decisions or regulated filings, you may need a full audit (positive assurance).
5. If in doubt, ask for clarification or additional procedures from the issuer or the accountant.
Example (illustrative)
Company ABC hires a firm to review its fiscal-year financials. The accountant performs inquiries of management, analytical comparisons to prior periods, and some targeted document inspections. No evidence of material errors or fraud is discovered. The accountant issues a report stating, in effect, “Based on our review, nothing came to our attention that would indicate…” — this is negative assurance: a conclusion based on limited procedures, not a full audit.
Typical wording (illustrative, not legal text)
– Review engagement wording (common): “Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with [applicable accounting framework].”
– Comfort-letter wording for securities offerings varies by practice and regulatory expectations; it typically uses negative-assurance style language for interim financial information.
When to seek positive (audit) assurance instead
– Legal or regulatory requirements mandate an audit (public company filings, many statutory reports).
– Significant risks of material misstatement or suspected fraud exist.
– Major financing or high-stakes transactions where third parties require stronger assurance.
– Users require a higher level of confidence than a review provides.
Relevant standards and guidance
– AICPA guidance (reviews, fraud considerations): e.g., “Consideration of Fraud in a Financial Statement Audit” and AICPA standards on review engagements (SSARS) for unaudited financial statements provide direction on limited procedures and reporting. (See AICPA materials for current standards and example wording.)
– Practice in securities offerings and regulatory filings may call for specific comfort-letter formats and procedures; follow applicable securities regulations and professional guidance.
Conclusion
Negative assurance is a useful, cost-efficient form of limited assurance that can give users a reasonable level of comfort in contexts where a full audit is unnecessary or impractical. However, it is not a substitute for an audit when higher assurance is required. Clear engagement terms, appropriate procedures, and transparent reporting are essential so that intended users understand the scope and limitations of the assurance provided.
Sources
– Investopedia: “Negative Assurance” (Investopedia / Jessica Olah). https://www.investopedia.com/terms/n/negative-assurance.asp
– AICPA: “Consideration of Fraud in a Financial Statement Audit.” (AICPA guidance referenced for fraud considerations and procedures.)
If you’d like, I can:
– Draft sample engagement-letter language for a negative-assurance review,
– Provide example negative-assurance report wording tailored to a review or comfort letter,
– Or outline the specific procedures an accountant could perform for a given industry or account balance.