What does 'reasonable assurance' in internal controls refer to?

'Reasonable assurance' in the context of internal controls refers to the level of confidence that the implemented controls are effective in preventing significant errors or fraudulent activities. This concept acknowledges that while internal controls are designed to mitigate risks and reduce the likelihood of adverse occurrences, they cannot guarantee that such events will never happen.

The use of the term 'reasonable' indicates that there is a balance between the cost of establishing controls and the expected benefits of those controls. Organizations aim to implement controls that are reasonably effective at reducing risks to an acceptable level without requiring excessive resources.

In this sense, reasonable assurance is about providing a high but not absolute level of confidence that the internal controls will function as intended and that significant errors or fraud will be detected or prevented. It ensures that stakeholders can trust the integrity of the financial reporting and operational processes, without expecting perfection.