Reasonable assurance arises because a practitioner (auditor) cannot give absolute assurance after completing his assignment. In the audit of financial statements for example, the auditor gives above-average assurance that the financial statements are true and fair; and complies with GAAP.
Definition of Reasonable Assurance
Reasonable assurance is defined as an opinion by the practitioner/auditor of a company that its examinations are true and fair. Also, it means a high level of assurance concluded by an auditor expressed in a positive form.
There are generally two levels of assurance that can be provided by a practitioner. Reasonable and limited assurance. For limited assurance, the auditor is providing an average assurance on its services. This is mostly due to insufficient audit evidence.
In real life, it is not possible to give absolute assurance regarding auditing services. Normally samples are taken from various sources within and outside the entity under examination. Because a total audit cannot be done, absolute assurance is not possible. And since the sample size was used, the items not included in the sample size may contain material misstatement.
Here, the auditor is given a high level of assurance. Which I called a more than average level of confidence that the audit job was satisfactory. In the external auditor report, it will be stated clearly: in our opinion, the accounts are true and fair.
Reasonable assurance is mostly used for the audit of financial statements. And it means that the auditor has examined the books of accounts and every other available evidence and he or she is satisfied that there is nothing to make him or her believe that there are material misstatements in the financial statements and that the entity complies with the generally accepted accounting practices.
Reasonable assurance is important to users of financial statements, especially to investors. It adds value to an entity’s financial reports and tells users that such statements are reliable. This is why as a user of financial statements the first place to go to in an annual report is the independent auditor reports.
Reasonable assurance is an above-average level of confidence from the auditor that the financial statement audit does not contain any material misstatement and that it complies with GAAP. This helps build confidence in the users of those statements.