Agreed-upon procedures (AUP) engagements are among the many services accounting firms offer. Because AUPs focus on a defined scope, they may cost less and take less time than a review or an audit. Plus, their versatility allows them to address financial or operational matters. This article provides answers to some common questions about this service.
What’s an AUP engagement?
In an AUP, an independent accountant performs specific procedures on a particular subject matter using established criteria. Upon completion, the accountant issues a written report that describes the work performed and the findings from each procedure. This report also identifies:
- The subject matter and the criteria used to evaluate it,
- The engagement’s intended purpose,
- The engaging party, and
- The responsible party.
The responsible party is usually either the engaging party or the person or organization responsible for the underlying subject matter. However, the responsible party isn’t always readily identifiable. Under the current attestation standards, the accountant isn’t required to obtain a written assertion from the responsible party before performing an AUP engagement.
In addition, the report should explain that:
- The engaging party has acknowledged that the procedures are appropriate for the engagement’s intended purpose,
- The accountant makes no representation about whether the procedures are appropriate for any other purpose,
- The engagement wasn’t an examination or review, and
- The accountant does not express an opinion or conclusion or provide assurance.
Depending on the circumstances, the report’s use may be restricted to specified parties. In other cases, the report may be suitable for general use, though the procedures are still designed for the engagement’s stated intended purpose.
What do AUPs cover?
AUPs use objective testing to address narrowly defined financial or operational matters. Examples of areas that may be addressed in an AUP are:
- Grant, regulatory or franchise agreement compliance,
- Verifying selected financial information during merger and acquisition due diligence,
- Construction project progress and spending practices, and
- Royalty payments under a licensing agreement.
The accountant may help develop or refine the procedures, but the engaging party must agree that they’re appropriate for the report’s purpose.
The procedures must be specific and objective enough to produce factual findings. For example, an accountant might inspect a stated number of invoices for documented approval. A request to determine whether an approval process is “adequate” would generally require the accountant to exercise judgment and reach a conclusion, which falls outside the scope of an AUP engagement. (See “AUPs in the real world” below.)
How do AUPs differ from consulting engagements?
In an AUP engagement, an independent accountant performs specified procedures and reports factual findings, including any exceptions found. But the accountant generally doesn’t interpret those findings, determine whether they’re favorable or unfavorable, or recommend corrective action.
Conversely, in a consulting engagement, an accountant, consultant or another qualified advisor may analyze information, evaluate alternatives and offer recommendations. The advisor might also help management implement changes to improve the business’s processes.
For example, an AUP might test whether purchase orders contained required approvals. A consulting engagement might evaluate the purchasing process and recommend internal control improvements. Clearly defining the desired outcome helps determine which service is appropriate.
Is an AUP right for your situation?
AUPs may complement annual financial statement reviews and audits, or they may be performed as separate engagements when an owner, lender or other third party needs specific information tested. They may be a good fit when the intended users understand the subject matter and want factual findings about narrowly defined issues.
However, an AUP may not be appropriate if users need an opinion on financial statements, assurance about specified information or recommendations for improvement. Contact your accountant to discuss what information you need, who will use it and which type of service is appropriate.
Sidebar: AUPs in the real world
To help you understand how agreed-upon procedures (AUP) engagements work, consider this common use scenario. Your lender waives a loan covenant violation after your year-end audit but requires evidence that certain financial measures improve by the following June. Instead of requiring another full audit, the lender asks you to hire an independent accountant to perform AUPs.
In this situation, your business is both the engaging party and the responsible party, and the lender is the intended user. Based on the lender’s request, the accountant might:
- Recalculate your debt-to-equity ratio at midyear,
- Compare selected revenue figures with supporting invoices, and
- Verify that required loan payments were made on time.
You, as the engaging party, acknowledge that these procedures are appropriate for the report’s purpose. Upon completion, the accountant issues a report describing the procedures performed and the findings, including any exceptions.
The report doesn’t state whether your business is financially healthy or whether the lender should continue the waiver. Instead, the lender uses the AUP finding to make its decision.
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