What is Negative Assurance?

What is Negative Assurance?

Negative assurance is a statement by a CPA that no adverse issues have been found regarding the accuracy of a client’s financial statements. This assurance is most commonly given when the CPA is asked to render an opinion regarding financial statements that have already received an audit opinion, usually in an earlier period. Negative assurance is also given when the CPA is asked to render an opinion regarding financial information being relied upon as part of the issuance of securities.

This type of assurance is only permissible when the CPA directly gathers audit evidence, rather than relying upon evidence gathered by a third party. The audit procedures used as the basis for a negative assurance statement are not as robust as what would be required for the more common positive assurance statement.

Negative assurance is only used when it is not possible to obtain positive assurance, which requires the collection of specific proof that an entity’s financial statements portray an accurate picture of its financial results, financial position, and cash flows.

Understanding Negative Assurance

Negative assurance usually arises in the absence of positive assurance. A positive assurance of accuracy is considered stronger and means that the auditor has done sufficient work to state that a company’s financial statements provide an accurate picture of its true financial condition based on proofs.

Positive assurance is required for certain audited financial reports released by public companies. Since fully auditing a public company in accordance with generally accepted accounting principles (GAAP) is a large undertaking, a positive assurance is normally issued only when legally required.

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Negative assurance is most often issued when an accountant is asked to review certified financial statements prepared by another accountant. In this case, since another accountant has already certified the accuracy of the statements, a negative assurance is often seen as sufficient to confirm that the statements are free of material misstatements. Negative assurance opinions are also issued when an accountant is asked to review statements associated with the issuance of securities.

To issue a negative assurance opinion, the accountant must gather audit evidence directly and may not rely on indirect evidence, that is, evidence provided by a third party. The procedures used in the preparation of a negative assurance opinion are not as stringent as those required for a positive assurance opinion.

It is important to note that negative assurance is not stating that any illegal activity did not occur, it is stating that the auditor could not find any instances of illegal activity.

Why Does Negative Assurance Matter?

A negative assurance is actually a very good thing. It is important to note, however, that a negative assurance does not mean that the audited company has not committed fraud or violated accounting rules. It simply means that the auditor could not find any evidence of those things during the audit. Negative assurances also help establish a defense to claims that investors might bring under Rule 10b-5 of the Securities Exchange Act of 1934.

When to Issue Negative Assurance?

When some External Auditor or Accountant is analyzing and reviewing another Auditor’s/Accountant’s work and does not find enough shreds of evidence about the wrongdoing then the issuance of Negative Assurance takes place. Also, here the scope of examination is very narrow, as the Auditor only verifies a few things. As a result, the Auditor is not 100% sure about the company and so releases this written document.

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Often the issuance of this document takes place for the external public at large. It is released before the issuance of its securities.

Thus the purpose of issuance can be for internal purposes or external purposes.

Example of Negative Assurance

Company ABC hires an auditing firm to go over its financials from the fiscal year 2019. The auditor assigned to the case looks over all the accounting documents, which include general ledgers, journals, and other various financial documents. The auditor does not check every specific entry but does a comb through of all of the relevant information. The auditor then interviews employees and management on specific topics. After this review, the auditor does not find any instances of fraud or any accounting violations. The auditor then issues a negative assurance that confirms no issues, errors, or misstatements were found.