Financial reporting is an important part of running a business, but simply preparing financial statements does not always provide stakeholders with the level of confidence they need.

Auditing and assurance services provide independent ways of examining financial information, processes and other areas of an organisation. Although the terms are often used together, audit and assurance are not exactly the same thing.

Understanding the difference can help Australian businesses determine what type of review is appropriate for their circumstances.

What Is an Audit?

An audit is a structured and independent examination performed within a defined scope.

For a financial statement audit, the auditor examines financial information and obtains evidence to support an opinion on the financial report.

The work may involve considering:

• Financial transactions

• Accounting records

• Bank reconciliations

• Revenue and expenses

• Assets and liabilities

• Supporting documentation

• Relevant internal controls

The specific procedures depend on the organisation and the audit engagement.

What Is Assurance?

Assurance is a broader concept.

An assurance engagement can provide confidence about specified information, processes or controls without necessarily being a full financial statement audit.

For example, an organisation may require assurance over a particular process, control environment or other area relevant to its operations.

The level and type of assurance depend on the engagement and what users of the information need.

Audit and Assurance Are Not the Same Thing

A simple way to understand the distinction is that an audit is a specific type of assurance engagement.

An audit has defined objectives, procedures and reporting requirements. Assurance can cover a broader range of independent reviews.

The right approach depends on what the organisation is trying to establish and who will rely on the resulting information.

Why Australian Businesses Use Audits and Assurance

A business may seek an audit or assurance engagement for several reasons.

Financial Reporting Requirements

Certain Australian entities have specific financial reporting and audit obligations. For example, ASIC states that certain companies, including large proprietary companies, are subject to financial reporting requirements and generally require audited financial reports unless applicable relief applies.

Funding and Investment

Banks, investors and other stakeholders may require reliable financial information before making decisions.

An independent audit can provide additional confidence where audited financial information is relevant to the decision.

Business Growth

As an organisation grows, financial processes can become more complex. An independent review can help management understand whether the systems supporting financial reporting remain appropriate.

Stronger Governance

Auditing and assurance can also form part of a broader governance framework by providing independent information to management and those responsible for oversight.

Internal Controls Are Part of the Bigger Picture

Financial information is produced through processes and systems. If those processes are weak, financial reporting can be affected.

Internal controls may include:

• Approval procedures

• Segregation of duties

• Access controls

• Reconciliations

• Financial review procedures

• Documentation requirements

Testing selected controls can help determine whether they are operating effectively.

Businesses may therefore consider internal controls testing alongside their broader audit and assurance activities.

Risk Management and Assurance

Risk management is another important part of the picture.

A business needs to understand the risks that could affect its financial reporting, operations and objectives. Assurance activities can then provide independent information about selected areas of that risk environment.

Professional risk consulting can support organisations that want to assess and manage broader business risks.

Choosing the Right Type of Engagement

Before arranging an audit or assurance engagement, businesses should consider what they actually need.

Questions worth asking include:

• What information needs to be independently assessed?

• Who will rely on the results?

• Is a statutory audit required?

• Are specific controls causing concern?

• Is the organisation reviewing a particular business process?

• What level of assurance is appropriate?

Answering these questions can help establish a suitable scope.

How Businesses Can Prepare

Good preparation can make an audit or assurance engagement more efficient.

Businesses should aim to maintain accurate records throughout the year rather than waiting until the engagement begins.

It is also useful to keep supporting documentation organised and ensure relevant employees understand the processes being reviewed.

Frequently Asked Questions

What is the difference between audit and assurance?

An audit is a specific type of independent assurance engagement, usually involving an examination of financial information and an audit opinion. Assurance is a broader term that can cover different types of independent reviews.

Does every Australian business need an audit?

No. Audit requirements depend on the type of entity, its circumstances and applicable Australian legislation. Some businesses may also choose an audit even when it is not legally required.

Can assurance cover internal controls?

Yes. Depending on the engagement, assurance work can consider selected controls or processes and provide an independent conclusion within the agreed scope.

How do risk management and assurance work together?

Risk management focuses on identifying and managing risks, while assurance can provide independent information about selected areas. They can complement one another as part of a broader governance framework.

How should a business choose between an audit and another assurance engagement?

The appropriate engagement depends on the information being examined, the users of the information, applicable requirements and the level of assurance needed.

Conclusion

Audit and assurance services can provide Australian businesses with useful independent insight into financial information, processes and controls. Understanding the distinction between the two helps organisations choose an engagement that matches their actual requirements rather than treating every review as the same exercise.