A lender requests assurance about debt covenants, while a grantor requests an opinion on compliance with award requirements. Those requests can require different engagements, evidence, conclusions, and restrictions, even when the same firm audits the entity's financial statements.
Negative assurance reports that specified work brought no indication of noncompliance to the auditor's attention, with identified exceptions disclosed. For contracts connected with audited financial statements, this assurance has a limited purpose and cannot support an unrestricted assertion that every contractual obligation was satisfied.
The American Institute of Certified Public Accountants (AICPA) establishes generally accepted auditing standards (GAAS) for nonissuer audits and standards for attestation engagements. Issuer financial statement audits follow Public Company Accounting Oversight Board (PCAOB) standards; the corresponding clean opinions are unmodified (unqualified).
Generally accepted government auditing standards (GAGAS) apply when laws, regulations, agreements, policy, or voluntary adoption establish that framework for the engagement. Issuer status, public funding, and Securities and Exchange Commission reporting requirements do not independently establish a GAGAS engagement.
Common mistakes
- Wrong assurance from correct arithmetic. A current ratio of 1.60 against a 1.50 minimum does not establish whether the requested report is audit-connected or an examination.
- Qualification ignored. Missing inventory evidence can undermine assurance about an inventory-dependent covenant even when the financial statement opinion is only qualified.
- Control finding drives everything. A significant deficiency with $0 questioned costs does not automatically modify the compliance opinion.
Bottom line
- Audit-connected negative assurance covers identified accounting provisions reached through the financial statement audit and ordinarily restricts use to appropriate specified parties.
- An adverse financial statement opinion or disclaimer prevents audit-connected negative assurance; a qualification requires evaluation of its relevance to the covered provisions.
- A compliance examination provides reasonable assurance and an opinion against specified criteria; control effectiveness requires its own appropriately supported examination.
- AUP engagements report procedures and findings without assurance, and the compliance attestation provisions do not permit a review alternative.
Exam shortcut
First, circle the requested output: audit-based negative assurance, specific findings, compliance opinion, or control-effectiveness opinion. Then identify the governing engagement. For a covenant letter, inspect the financial statement opinion and trace any qualification to the covenant's inputs before choosing report language. For an opinion modification, mark the cause as established departure or missing evidence, then evaluate materiality and pervasiveness to the specified subject.
The full lesson (about 7,155 words, 48 min read) adds 4 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- IV.D1
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