Assurance engagements are often considered the backbone of financial audits. They are critical for ensuring that the information presented in financial statements accurately reflects the financial status of a company. One type of assurance engagement that has gained popularity among businesses in recent years is agreed upon procedures (AUPs). But what exactly are AUPs? Are they truly an assurance engagement?
In short, AUPs are a unique type of assurance engagement that involve performing specific tests and procedures on a company’s financial information, as opposed to issuing an overall opinion on the information presented in the financial statements. Rather than a standard audit, AUPs are tailored to a company’s specific needs, and the procedures performed are agreed upon by the company and the auditor. This allows companies to target specific areas of concern without having to undergo a full financial audit.
The benefit of AUPs is that they provide a higher level of comfort to stakeholders regarding the accuracy of specific components of financial statements. They can be used to test the effectiveness of a company’s internal controls, compliance with regulatory requirements, or the accuracy of specific accounts. While AUPs may not provide the same level of assurance as a full audit, they can provide valuable insights into specific areas of a company’s finances. Therefore, it is no wonder why many companies are turning to AUPs as a more flexible and cost-effective way to obtain some level of assurance about their financial statements.
The Definition of Agreed Upon Procedures
Agreed Upon Procedures (AUP) is a type of assurance engagement where an independent party is hired to carry out specific procedures and report the findings to the client. AUP is not an audit or a review, but rather a customized engagement designed to meet a specific need of the client.
- AUP is frequently used when an organization needs assurance on a specific area of their financial statements or operations.
- The scope of the procedures is agreed upon by the client and the practitioner, and the report is issued to the clients only.
- The procedures carried out under AUP can vary depending on the needs of the clients, and it can include things like testing controls, checking compliance with contracts and regulations, and verifying information provided by the client.
AUP reports are designed to provide factual findings, and they do not include any assurance on the financial statements as a whole. Therefore, the users of AUP reports need to be careful while interpreting the findings and should not make any conclusions without understanding the nature and scope of the work carried out.
Overall, AUP is an effective tool for clients who need a customized and targeted assurance engagement. It ensures that specific areas of concern are addressed and reported on, giving the client peace of mind that their needs are met.
Types of Assurance Engagements
Assurance engagements refer to the services offered by independent professionals to provide assurance on the quality, relevance, and reliability of a target entity’s information. An assurance engagement is defined as a type of engagement that requires an independent practitioner to evaluate or measure the subject matter of the engagement against a set of criteria. There are several types of assurance engagements, including:
- Statutory audits
- Regulatory compliance audits
- Agreed-upon procedures engagements
- Review engagements
- Compilation engagements
- Other assurance engagements
Agreed-upon procedures engagements are a form of assurance engagement where the practitioner, the client, and the intended users of the report agree on the procedures to be performed by the practitioner and the form and content of the report. The practitioner does not provide any form of assurance or opinion on the subject matter under review. Instead, they only present the results of their procedures without drawing any conclusions or expressing an opinion.
Agreed-upon procedures engagements are typically performed to provide the intended users with specific facts, findings, or information about a particular aspect of a business. In this type of engagement, the practitioner agrees with the client and the intended users of the report on the specific procedures to be performed. The procedures agreed upon may vary depending on the issue being examined, and they may be comprehensive or limited in scope.
| Key Characteristics of Agreed-upon Procedures Engagements |
|---|
| The practitioner and the client agree on the procedures to be performed and the form and content of the report. |
| The practitioner does not provide any form of assurance or opinion on the subject matter under review. |
| The results of the procedures are presented without any conclusions or expressions of opinion. |
| The intended users of the report use the information to draw their conclusions on the subject matter under review. |
Overall, agreed-upon procedures engagements are an excellent way to provide specific information to the intended users of the report without drawing any conclusions or expressing an opinion. They involve an agreement between the practitioner, the client, and the intended users of the report on the scope of the work to be performed, and the results of the procedures are presented without any conclusions or opinions. Other types of assurance engagements involve providing assurance or an opinion on the subject matter under review, but this is not the case with agreed-upon procedures engagements.
Benefits of Agreed Upon Procedures
Agreed Upon Procedures (AUP) is an assurance engagement where the auditor performs certain procedures and tests on specific aspects of financial information. The auditor will report factual findings on the results of the procedures without forming any opinion or conclusion. AUP provides several benefits for various stakeholders such as management, audit committees, shareholders, and potential investors.
- Customized procedures: AUP provides flexibility in selecting procedures tailored to meet specific needs of stakeholders. The procedures can be designed to focus on unique areas of potential concern and specific financial information. For example, an audit committee may require specific procedures to test the effectiveness of internal controls over financial reporting.
- Transparency: AUP provides a transparent approach where the auditor and stakeholders agree on the procedures and tests to be performed. This provides confidence in the reliability and relevance of the results reported.
- Cost-effective: AUP engagements are usually less costly than traditional audits as they are typically limited in scope. This makes it an attractive option for organizations with limited resources or those who need to comply with regulatory requirements but have a limited budget.
AUP engagements can provide a range of benefits for various stakeholders with customized procedures, transparency, and cost-effectiveness being among the most significant advantages. These benefits make them a desirable and efficient alternative to traditional audits and other assurance engagements for certain stakeholders.
Moreover, the procedures can be used to test compliance with regulatory requirements, specific contracts, agreements, or other financial arrangements. They can also provide valuable insights into the financial performance of the organization and can be used to identify potential areas of weaknesses that require remediation.
Types of Procedures
There are various types of procedures that can be performed under AUP engagements. The engagement team, in consultation with stakeholders, will determine the specific procedures to be performed based on the nature and scope of the engagement. These procedures can include:
- Reconciliations of accounts and schedules
- Agreed-upon analytical procedures
- Agreed-upon compliance tests
- Agreed-upon substantive procedures
Reporting on Findings
The final report of AUP provides factual findings on the results of the procedures. However, the report does not provide any opinion, conclusion, or assurance about the financial information. This reporting approach provides a clear distinction between an AUP engagement and other types of assurance engagements.
| Advantages | Disadvantages |
|---|---|
| Flexible procedures | Not suitable for all stakeholders |
| Cost-effective option | Reporting might not meet requirements of third parties |
| Provides customized solutions | Results depend on procedures performed only |
The benefits of AUP engagements make them a valuable tool for stakeholders in gathering information, ensuring transparency, and identifying potential weaknesses. As with any other assurance engagement, it is essential to understand the scope, nature, and objectives of the AUP engagement, including the procedures to be performed and the reporting on the results.
Limitations of Agreed Upon Procedures
While Agreed Upon Procedures (AUP) engagements have their benefits, there are also some limitations to consider. Here are four key areas where AUP engagements may fall short:
- No Opinion or Assurance: One of the main limitations of an AUP engagement is that it does not provide an opinion or assurance to the user of the report. Instead of giving an assessment, the AUP report simply presents the findings of the procedures performed. Therefore, the reader of the report must use their own judgement to make decisions based on the information presented.
- Limited Scope: AUP engagements only cover the specific procedures that were agreed upon between the parties involved. This means that if additional procedures are needed or changes occur during the engagement, they must be agreed upon before they can be considered in the final report. AUP engagements may not provide the comprehensive coverage that some users need or expect.
- Reliance on Management Representations: In an AUP engagement, the auditor relies on management representations to obtain the information needed to perform the procedures. This means that the auditor accepts the information provided by management without performing additional procedures to verify its accuracy. As a result, the findings of the engagement may be limited by the accuracy and completeness of the information provided by management.
- No Independence: Another limitation of an AUP engagement is that the auditor does not provide an independent opinion. Instead, the auditor is simply reporting on the procedures performed and the information obtained. This means that the auditor may have less credibility or objectivity than if they were providing an opinion or assurance.
Conclusion
While AUP engagements can be a useful tool for parties who want to obtain a report on the results of specific procedures, they do have limitations. These limitations include a lack of opinion or assurance, a limited scope, reliance on management representations, and no independence. Before engaging in an AUP engagement, it is important to consider these limitations and determine whether they may impact the usefulness of the report.
The Process of Conducting Agreed Upon Procedures
Agreed Upon Procedures (AUP) is an assurance engagement where a practitioner is engaged to carry out specific procedures and to report findings based on those procedures to the requesting party. The engagement is focused on specific subject matter, identifying specific procedures, and providing a report that contains factual findings based on those procedures.
- The first step in conducting AUP is to identify the subject matter. This could be any area of interest, such as financial statements, internal controls, or compliance with specific regulations. The subject matter needs to be clearly defined and agreed upon by all parties involved.
- The next step is to identify the procedures to be performed. The practitioner needs to obtain a clear understanding of the subject matter and the expectations of the requesting party. Based on this understanding, the practitioner can design specific procedures to be performed.
- Once the procedures are identified, the practitioner needs to perform the procedures. The procedures need to be performed in accordance with the agreed-upon terms and procedures. The practitioner needs to exercise professional judgment, obtain sufficient and appropriate evidence, and document the procedures performed and the observations made.
After the procedures are performed, the practitioner needs to communicate the findings to the requesting party. The report needs to be written and include the procedures performed, the observations made, and the findings. The practitioner needs to ensure that the report is factual, unbiased, and based on the procedures performed.
The Importance of Independence in the AUP Engagement Process
Independence is a critical component of the AUP engagement process. The practitioner needs to maintain independence in both fact and appearance when conducting the engagement. The practitioner needs to be objective, impartial, and free from conflicts of interest.
The practitioner needs to disclose any relationships or circumstances that could impair their independence. If the practitioner is not independent, the engagement cannot be performed, and the report will not be valid.
AUP Report Format
The AUP report needs to be clear, concise, and focused on the procedures performed and the findings. The report should include:
| Section | Description |
|---|---|
| Introduction | Provides an overview of the engagement |
| Scope | Describes the subject matter and the procedures performed |
| Findings | Presents the findings based on the procedures performed |
| Conclusion | Summarizes the findings and provides an opinion, if appropriate |
The AUP report needs to be tailored to the needs of the requesting party. The format and content of the report may vary depending on the subject matter, the procedures performed, and the intended users of the report.
Importance of Professional Skepticism in Agreed Upon Procedures
Professional skepticism plays a crucial role in agreed upon procedures engagements. This is because, in such a type of engagement, the practitioner, who is usually an independent accountant, is required to perform procedures on a subject matter with the purpose of presenting findings that are based on factual information, but without offering an opinion or conclusion.
The concept of professional skepticism requires the practitioner to have a questioning mind and be alert to conditions that indicate possible misstatements, fraudulent activity, or other irregularities. It is vital to maintain an inquisitive stance even when there is no obvious indication of issues or discrepancies.
Reasons why Professional Skepticism matters in Agreed Upon Procedures
- It helps the practitioner to avoid being misled by information provided by the client or other sources.
- Professional skepticism assists the practitioner to remain impartial and avoid the effects of biases, assumptions, or preconceptions.
- It raises the level of scrutiny, so the practitioner can detect any material errors or misstatements that may relate to the subject matter.
- Professional skepticism enhances the credibility of the practitioner’s findings, which depend on the quality and reliability of the evidence obtained.
How to Incorporate Professional Skepticism in Agreed Upon Procedures
One way that practitioners incorporate professional skepticism in agreed upon procedures is by designing procedures that target areas that have the highest likelihood of material misstatements. By focusing on risk areas, the practitioner can allocate resources appropriately and conduct a more thorough engagement. Additionally, adopting a skeptical mindset involves not accepting management’s representations at face value. Practitioners should corroborate the information provided by the client by obtaining evidence from independent sources or performing other procedures to verify its accuracy.
Another way to incorporate professional skepticism is to maintain an independent attitude towards the engagement. Practitioners should avoid being influenced by their prior experience with the client or the knowledge of the client’s business operations. They should remain objective and vigilant while performing their work.
Conclusion
Professional skepticism is an essential concept that practitioners must incorporate while conducting agreed upon procedures engagements. It is not only a requirement by professional standards, but it is also a practice that ensures the credibility and reliability of the practitioner’s findings. By maintaining an inquiring attitude towards the subject matter and avoiding the effects of biases, practitioners can enhance the level of scrutiny and detect any material misstatements that may exist. Incorporating professional skepticism not only helps the practitioner to execute their work more effectively, but it also increases the value to the client and facilitates meaningful conclusions.
| Benefits of Professional Skepticism in Agreed Upon Procedures |
|---|
| 1. Helps in detecting material misstatements |
| 2. Enhances credibility and reliability of findings |
| 3. Reduces biases and preconceptions |
| 4. Assists in avoiding being misled by the client or other sources |
By adopting a skeptical mindset, auditors can enhance the quality of their procedures and findings and promote greater transparency and accountability.
Key Considerations Before Engaging in Agreed Upon Procedures
Agreed Upon Procedures (AUP) is an assurance engagement that provides users with factual findings, based on specific procedures agreed upon by the engaging party and the practitioner. Before engaging in AUP, it is critical to consider the following key considerations to ensure the effectiveness of the engagement.
- The Scope of the Engagement: It is vital to define the scope of the AUP engagement with the client, outlining the specific procedures that will be performed. The scope should also define the criteria that will be used to evaluate the functions or activities under examination.
- The Responsibilities of Each Party: The engagement letter should outline the responsibilities of each party, including the responsible party, the engaging party, and the practitioner. This will help ensure that each party is aware of their role in the engagement and agrees to meet their obligations.
- The Timing of the Engagement: It is crucial to consider the timing of the engagement, as AUP engagements typically require a significant amount of time and resources. The engagement should be scheduled at a time when the client and the practitioner have sufficient time to perform the agreed upon procedures and finalize the report.
Other key considerations to take note of include:
- The skills and experience of the practitioner
- The availability of information and documentation required for the engagement
- The cost-benefit analysis of the engagement for the client
Before engaging in AUP, it is essential to have a clear understanding of the objectives of the engagement and the requirements of the client to ensure that the engagement will meet the client’s specific needs.
Below is a table outlining the advantages and disadvantages of AUP engagements:
| Advantages | Disadvantages |
|---|---|
| Flexible engagement – procedures can be tailored to meet specific needs | Does not provide an opinion or conclusion on the subject matter |
| Provides users with factual findings based on agreed-upon procedures | May not be suitable for large-scale engagements or complex subject matters |
| Offers a cost-effective alternative to financial statement audits | Requires the client to have sufficient knowledge of the subject matter under examination to be able to provide the engaging party with the necessary information |
Overall, understanding the key considerations before engaging in AUP will help ensure that the engagement is completed effectively and efficiently, meeting the specific needs of the client.
Is Agreed Upon Procedures an Assurance Engagement FAQs
1. What is an agreed upon procedures engagement?
An agreed upon procedures engagement is a type of assurance engagement where the auditor provides a report on factual findings based on specific procedures agreed upon with the client.
2. Who can request an agreed upon procedures engagement?
An agreed upon procedures engagement can be requested by anyone who needs an independent report on certain procedures or activities, such as a creditor, a regulatory body, or an investor.
3. What are the benefits of an agreed upon procedures engagement?
An agreed upon procedures engagement can provide assurance to stakeholders that certain procedures or activities have been carried out according to predetermined criteria, and can help identify areas for improvement.
4. How does an agreed upon procedures engagement differ from other assurance engagements?
An agreed upon procedures engagement differs from other assurance engagements (such as audits or reviews) in that the auditor does not provide an opinion, but only provides a report on factual findings based on specific procedures agreed upon with the client.
5. What is the scope of an agreed upon procedures engagement?
The scope of an agreed upon procedures engagement is determined by the procedures agreed upon with the client, and can include any areas of the client’s operations that require examination or evaluation.
6. How is an agreed upon procedures engagement conducted?
An agreed upon procedures engagement is conducted in accordance with agreed-upon procedures and applicable professional standards, and involves performing specific procedures to obtain evidence about the subject matter.
7. What is the format of an agreed upon procedures report?
The format of an agreed upon procedures report typically includes a description of the procedures performed, the findings based on those procedures, and any other relevant information necessary to provide accurate and reliable information.
Closing Thoughts
Thank you for reading about is agreed upon procedures an assurance engagement. We hope that this article has helped clarify some of the common questions about this type of engagement. If you have any further questions or would like to learn more, please don’t hesitate to contact us. We look forward to hearing from you soon.