This blog is written by Mr. Ahmed Yar Khan, Senior Manager Audit and Assurance Services. Please read this blog and provide your valued comments.
Agreed-Upon Procedures Engagements
There are a number of non-audit services available for small and medium-sized entities (SMEs), including review, compilation, other assurance, and engagements to perform agreed-upon procedures. The choice of service will depend on the circumstances for each individual entity and requires careful consideration. A brief summary of the options and the applicable international standard are as follows:
- Review Engagements: the practitioner provides a limited assurance report following a review of the entities historical financial statements. This can be based on the International Auditing and Assurance Standards Board (IAASB)’s International Standard on Review Engagements (ISRE) 2400 (Revised);
- Compilation Engagements: the practitioner assists management in preparing and presenting historical financial information and issues a report stating that no assurance is provided. This can be based on the IAASB’s International Standard on Related Services (ISRS) 4410, Compilation Engagements;
- Other Assurance Engagements: the practitioner provides either reasonable or limited assurance under the IAASB’s International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information; and
- Agreed-Upon Procedures (AUP) Engagements: the practitioner provides a report based on factual findings regarding financial information—no assurance is expressed. The report is not distributed publicly—it is restricted to those parties that have agreed to the procedures. The engagement can be based on the IAASB’s ISRS 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information.
What are agreed-upon procedures?
AUP engagements have the potential to be an attractive and fast growing service offering to SMEs. Clients may not need an audit, but may greatly benefit from an AUP engagement to satisfy banking or vendor needs (for example, to advance a business transaction, or verify to management that certain financial reporting processes and controls are operating effectively).
According to ISRS 4400, the objective of an AUP engagement is to carry out procedures of an audit nature to which the practitioner, the entity, and any appropriate third parties have agreed and to report on factual findings. These engagements may entail the practitioner performing certain procedures concerning individual items of financial data (for example, accounts payable, accounts receivable, purchases from related parties, and sales and profits of a segment of an entity), a financial statement (for example, a balance sheet) or even a complete set of financial statements. While directed toward engagements regarding financial information, ISRS 4400 may provide useful guidance for engagements regarding non-financial information, provided the auditor has adequate knowledge of the subject matter in question and reasonable criteria exist on which to base their findings.
Examples of AUP engagements, both on financial and non-financial information, include:
- Due diligence when buying or selling a business
- Verifying cash balances
- Checking security balances
- Income tax provisions
- Accounts receivable/payable processes
- Special reviews of loan portfolios
- Reviews of internal control and environmental management systems
- Royalty agreements compliance
- Employer compliance/payroll audits
- Purchasing department compliance
Because the practitioner is simply providing a report of the factual results of the AUP, no assurance is expressed. Instead, users of the report assess for themselves the procedures and findings reported by the practitioner and draw their own conclusions from the work. For example, the practitioner may be engaged to help the client evaluate the validity of their accounts payable at a certain date. Procedures may comprise:
- Checking the addition of the trial balance of accounts payable prepared by the client at a specific date and comparing the total to the balance in the related general ledger account.
- Comparing a list of major suppliers and the amounts owing at a specific date to the related names and amounts in the trial balance.
- Obtaining suppliers’ statements or requesting suppliers to confirm balances owing at a specific date, and comparing such statements or confirmations to the amounts in the trial balance. For amounts that do not agree, obtaining and reviewing reconciliations from the client.
The practitioner should consider whether the nature of the engagement is suitable to the circumstances. Such considerations should include:
- The intended use of the report – AUPs reports may be suitable for internal use, but are unlikely to meet the needs of providers of finance for a transaction, who may be expecting full acquisition due diligence.
- The level of sophistication of the user – before providing a limited scope of work such as AUPs in the context of a transaction, the practitioner should be satisfied that management have the skills and experience to use the findings in the context of their own due diligence, rather than placing an inappropriate degree of reliance on the report.
- The overall level of risk and related reward.
Ahmed Yar Khan