Chapter 25, Problem 1RQ

To determine

Explain level of assurance and how does it differ for audit of financial statements, a review, compliance and preparation engagement.

Explanation of Solution

Level of assurance is the level of comfort the preparer of the financial statements are being provided while preparing the financial statements. It is also a tool to measure the reliability of the financial statements.

Following is the level of assurance in the given scenarios:

• In audit, the level of assurance is very high as the audit involves in-depth checking of the financial statements along with its internal controls.
• In reviewing the service engagement, the accountant expresses that the financial statements prepared are in compliance with the relevant standards. Since, only the accountant does the review and thus, engagement provides the least level of assurance.
• In a compliance service agreement, accountant applies accounting information to assist the management in preparation of financial statements and its related notes to accountant. Both, management and accountant are engaged in preparation and reviewing of the financial statements and thus, the level of assurance is a little higher.
• In preparation of the review standards, the CPA is involved actively in preparation of the financial statements. Thus, it is the second most level of reliable factor after audit of financial statements.