auditing and assurance

Imagine you are about to lend a friend a large sum based on a one-page summary of their finances that they wrote themselves. You would feel a lot better if a trusted, independent person looked over their bank statements and confirmed that the summary was honest. Auditing is exactly that service for businesses: an independent expert examines a company's financial records and gives an outside opinion on whether the numbers can be trusted. Assurance is the broader family this belongs to — any service where a professional improves the confidence others can place in a piece of information.

More precisely, an audit gathers evidence to test whether financial statements are presented fairly, in all material respects, according to an agreed set of rules (such as GAAP or IFRS). The auditor does not prepare the numbers — management does that — and the auditor does not guarantee the company is healthy or a good investment. Instead the auditor expresses a level of assurance. A full audit gives 'reasonable assurance', a deliberately high but not absolute level of confidence; a lighter 'review' engagement gives only limited (moderate) assurance; and some other services give no assurance at all. The output is a written report that the company attaches to its financial statements.

This matters because investors, lenders, regulators, and the public cannot personally inspect every company's books. Assurance lets a stranger rely on numbers prepared by people who have an incentive to look good. Be honest about the limit, though: an audit is built on sampling and judgement, not a recount of every transaction, so even a clean audit can never promise that the statements are perfectly free of error or fraud — only that they are reasonably likely to be fair.