When it comes to financial reporting, one of the most common questions business leaders face is, “Do I need an audit or are reviewed financial statements enough?” The answer often comes down to understanding the difference between limited assurance and reasonable assurance.
Both provide confidence in your financial statements. However, they offer different levels of assurance, with varying costs, and are often used for different purposes.
Here’s how to determine which type of assurance your company needs.
Key Takeaways:
- Limited assurance reviews provide moderate confidence in financial statements, using inquiries and analytics at a lower cost.
- Reasonable assurance audits deliver higher confidence through testing, confirmations, and internal control reviews.
- Choosing between the two depends on business or organizational goals, investor or lender requirements, and regulatory obligations.
What Is Limited Assurance?
Limited assurance is offered through review engagements. Limited assurance reviews:
- Focus on inquiries and trend analysis
- Provide a moderate level of confidence
- Are cost-effective and quicker than an audit
During this kind of engagement, an auditor conducts a review of analytical procedures and inquiries by applying generally accepted accounting principles (GAAP). Through the review, they determine whether any material modifications are needed for the financial statements without diving into detailed testing.
It’s common for private companies, nonprofit organizations, and startups that do not need audited financial statements to opt for limited assurance reviews. These reviews provide stakeholders with a reasonable amount of confidence and assurance that all finances are in order.
What Is Reasonable Assurance?
Reasonable assurance is delivered through an audit engagement. In this case, an auditor goes beyond inquiries to test internal controls, verify balances, and examine supporting documentation.
The process is much more complex compared to a limited assurance review. Although it takes a significant amount of time and effort, as Scott Mattson, CPA, Partner at Assurance Dimensions, explains, “Clients sometimes think we look at every transaction. In reality, we test a sample, usually 10–20% of transactions, which provides a reliable but practical level of assurance.”
Reasonable assurance audits are designed to provide a high level of confidence that financial statements are free from material misstatement, whether due to fraud or error.
Key Differences Explained
| Aspect | Limited Assurance (Review) | Reasonable Assurance (Audit) |
| Confidence Level | Moderate | High |
| Procedures | Inquiries and analytics | Testing, confirmations, internal controls |
| Time & Cost | Lower | Higher |
| Common Uses | Private businesses, nonprofits, and early-stage financing | Investors, lenders, and regulatory requirements |
When to Use Each Type of Assurance
The right assurance level depends on your goals and obligations. Here’s a quick rundown of how to choose the right level of assurance:
- Early-stage or private companies: A review may be sufficient to satisfy investors or board members.
- Seeking loans or outside investment: Lenders and investors often require an audit for higher confidence.
- Regulatory or grant compliance: Audits may be mandatory, particularly for larger nonprofits or organizations that receive federal funding.
- Business acquisitions: Companies looking to sell their business typically require 2-3 years of audited financial statements for due diligence by the acquiring entity.
As Julian Sardinas, CPA, Partner at Assurance Dimensions, advises: “Start early and be realistic about timelines. Most businesses underestimate the time it takes to do a complete and thorough audit.”
How Assurance Dimensions Helps
At Assurance Dimensions, we don’t take a one-size-fits-all approach. Our team helps clients determine which engagement best matches their needs, whether that’s a voluntary review or audit for stakeholders or regulators.
We work closely with your management team to prepare clear, GAAP-compliant financial statements. We emphasize communication because, as Sardinas puts it, “Communication is key to a successful audit.”
Unsure if your business needs limited assurance or reasonable assurance? Our team can help you assess your reporting requirements and guide you to the most suitable solution.
Contact Assurance Dimensions to learn more about our compilations and review engagements.
