Agreed-Upon Procedures (AUP), an alternative Engagement

International Standard on Related Services 4400 (ISRS 4400), Engagements to Perform Agreed-Upon Procedures Regarding Financial Information is the international standard that addresses AUP engagements. The standard establishes requirements and provides guidance for performing an AUP engagement. Under ISRS 4400, an AUP engagement involves a practitioner performing procedures that have been agreed to by the practitioner, the entity and any appropriate third parties, and reporting on the factual findings based on the procedures performed.

Paragraph 4 of ISRS 4400 states that the objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

As the auditor simply provides a report of the factual findings of agreed-upon procedures, no assurance is obtained and neither is a conclusion nor opinion expressed. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work. The report provided is not distributed publicly – it is restricted to those parties that have agreed to the procedures.

An engagement to perform AUP may involve the auditor in 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.

Who uses an AUP Report ?

(Excerpted from : IFAC publication “Agreed-Upon Procedures Engagements, a Growth and Value Opportunity”) A wide range of stakeholders use reports of factual findings for a variety of reasons and the demand for AUP engagements continues to grow. For many entities, the demand for AUP engagements may be driven in part of the growth in regulation and the need for increased accountability around funding and grants. For example, funding bodies may ask for a report of factual findings to support or complement information such as audited financial statements or grant applications. For smaller entities, the increase in audit exemption thresholds in some jurisdictions may affect demand, prompting stakeholders to look for alternatives to audits. For example, banks may request a report of factual findings on receivables or inventory in place of audited financial statements. This more narrow focus may represent key areas of emphasis in support of lending agreements

Defining the Terms of the Engagement

Paragraph 9 of ISRS 4400 states that the auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive copies of the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of the engagement. Matters to be agreed include the following :

• Nature of the engagement including the fact that the procedures performed will not constitute an audit or a review and that accordingly no assurance will be expressed
• Stated purpose for the engagement
• Identification of the financial information to which the agreed-upon procedures will be applied
• Nature, timing and extent of the specific procedures to be applied
• Anticipated form of the report of factual findings
• Limitations on distribution of the report of factual findings. When such limitation would be in conflict with the legal requirements, if any, the auditor would not accept the engagement.

It is in the interests of both the client and the auditor that the auditor sends an engagement letter documenting the key terms of the appointment. An engagement letter confirms the auditor’s acceptance of the appointment and helps avoid misunderstanding regarding such matters as the objectives and scope of the engagement, the extent of the auditor’s responsibilities and the forms of reports to be issued.

Matters that would be included in the engagement letter include the following :

• A listing of the procedures to be performed as agreed upon between the parties
• A statement that the distribution of the report of factual findings would be restricted to the specified parties who have agreed to the procedures to be performed.

In addition, the auditor may consider attaching to the engagement letter a draft of the type of report of factual findings that will be issued (HRD).