A CPA is performing a review engagement of a non-public entity's financial statements. Which of the following statements about the CPA's assurance is correct?
- AThe CPA provides limited assurance that no material modifications should be made to the financial statements.
- BThe CPA provides no assurance on the financial statements, but expresses an opinion on their fairness.
- CThe CPA provides absolute assurance that the financial statements are presented fairly in all material respects.
- DThe CPA provides positive assurance that the financial statements are free from material misstatement.
Show answer & explanationAnswer & explanation
Correct answer: A. The CPA provides limited assurance that no material modifications should be made to the financial statements.
A review engagement provides limited assurance, expressed in the form of negative assurance. The practitioner states that based on the review, they are not aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.
Why the other options are wrong
- B. No assurance is provided in a compilation, and an opinion is expressed in an audit, not a review.
- C. Absolute assurance is never provided in any financial statement engagement due to inherent limitations of auditing/reviewing.
- D. Positive assurance is provided in an audit engagement, not a review.
Limited Assurance (Review)
Limited assurance, also known as negative assurance, is the level of assurance provided in a review engagement, stating that the practitioner is not aware of any material modifications needed for the financial statements to conform to the applicable framework.
- Expressed as 'nothing came to our attention...'.
- Less than reasonable assurance (audit).
- More than no assurance (compilation).
Memory trick: Assurance goes from None to Absolute (not really).