Q&A: Understanding Agreed Upon Procedures in Practice
How Agreed-Upon Procedures Provide Targeted Verification and Factual Findings for Your Business
What is an Agreed-Upon Procedures (AUP) engagement? An Agreed-Upon Procedures (AUP) engagement is a specialized service where a practitioner, such as a CPA or auditor, performs specific procedures on a subject matter and reports only the factual findings. Unlike a traditional audit, which offers an opinion on a company’s financial statements, an AUP provides no opinion or assurance. Instead, it offers a tailored, cost-effective way to get independent verification of specific data or processes, with the scope and nature of the work being determined and agreed upon by all parties involved.
Key Takeaways
What is an Agreed-Upon Procedures engagement?
An AUP is a customized service where an auditor performs specific tasks and reports the factual findings without giving a formal opinion.
Why might a business choose an AUP?
A business chooses an AUP to get a cost-effective and flexible way to verify specific data or processes.
How is an AUP report different from an audit report?
An AUP report presents only factual findings, while an audit report provides a professional opinion on the financial statements.
How is an AUP different from a traditional audit?
A traditional financial statement audit is designed to provide reasonable assurance that a company’s financial statements are free of material misstatement, resulting in an auditor’s opinion. The auditor determines the nature and extent of the procedures needed to form this opinion, following established auditing standards. An AUP engagement, however, is much more flexible and focused. The client and the practitioner collaboratively define the exact procedures to be performed, and the final report simply lists those procedures and the factual results found. The responsibility for drawing conclusions from the findings rests with the user of the report, not the practitioner.
When would a business need to use an AUP?
Businesses often use AUPs when they require independent verification for a specific purpose but don’t need a full audit. For example, a company might need to confirm compliance with a bank loan covenant, such as maintaining a specific debt-to-equity ratio. Instead of a full financial statement audit, which could be time-consuming and expensive, the company can hire a practitioner to perform a targeted AUP to test that single ratio. Other common scenarios include:
- Verifying royalty payments to a licensor
- Testing the accuracy of a company’s payroll system
- Confirming inventory counts for a potential buyer
- Reviewing specific controls within a new IT system
- Validating a business’s revenue recognition practices in a particular region
What are the key benefits of an AUP?
The primary benefits of an AUP are its flexibility and cost-effectiveness. Since the scope of the work is narrow and defined, the time and resources required are significantly less than for a full audit. This makes AUPs an ideal solution for addressing specific questions or concerns without the overhead of a comprehensive engagement. AUPs also provide a high degree of transparency because the report clearly lays out exactly what was done and what was found, allowing users to make informed decisions based on the factual data.
“A traditional audit… provides reasonable assurance that a company’s financial statements are free of material misstatement… an AUP engagement, however, is much more flexible and focused.”
What are the key benefits of an AUP?
The primary benefits of an AUP are its flexibility and cost-effectiveness. Since the scope of the work is narrow and defined, the time and resources required are significantly less than for a full audit. This makes AUPs an ideal solution for addressing specific questions or concerns without the overhead of a comprehensive engagement. AUPs also provide a high degree of transparency because the report clearly lays out exactly what was done and what was found, allowing users to make informed decisions based on the factual data.
Who typically uses an AUP report?
The AUP report is intended for the party or parties that agreed to the procedures, as they are best equipped to understand the purpose and limitations of the findings. These users can include management, lenders, investors, regulatory bodies, or partners in a joint venture. Because the report contains no opinion, it’s crucial for users to interpret the findings themselves and determine their significance. This is a key reason why AUPs are not a substitute for an audit when a business needs to provide general-purpose financial statements to external stakeholders.
A Flexible Solution for Targeted Needs
Agreed-Upon Procedures are a valuable tool in the audit professional’s toolkit, offering a pragmatic solution for businesses that need targeted, independent verification. They are a clear departure from traditional audits, providing a laser-focused view rather than a broad opinion. By understanding when to use an AUP and what its limitations are, businesses can efficiently address specific concerns, build trust with stakeholders, and make data-driven decisions without the commitment of a full-scale audit.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.
Questions?
Kelly has expertise in audit, review, and compilation services across diverse industries, including nonprofit organizations, construction, manufacturing, and technology. Kelly possesses an extensive background in auditing nonprofit organizations, particularly those receiving federal funding.