A common question we hear from business owners is:
“Do we really need an audit for this?”
Sometimes the answer is yes.
Sometimes the business does not actually need an audit. What it needs is a specific set of procedures performed and reported on for a particular purpose.
This is where agreed-upon procedures, commonly referred to as AUP, can be useful.
The important point is that an AUP engagement is not simply a cheaper version of an audit.
The two engagements serve different purposes.
What does a statutory audit provide?
A statutory audit is designed to provide reasonable assurance on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
The auditor performs procedures based on assessed risks and obtains sufficient appropriate audit evidence before expressing an audit opinion.
This makes an audit suitable when users need an independent opinion on the financial statements as a whole.
Typical users include shareholders, regulators, lenders and other stakeholders.
What is an agreed-upon procedures engagement?
Under ISRS 4400 (Revised), an agreed-upon procedures engagement involves procedures that are agreed between the practitioner and the relevant parties.
The practitioner performs those specific procedures and reports the factual findings.
The practitioner does not provide an audit opinion.
The IAASB explains that AUP engagements are used by a broad range of stakeholders, including regulators, funding bodies and creditors, for different purposes. The revised standard also places greater emphasis on professional judgement, engagement acceptance, independence and clarity in reporting the findings.
For example, a company may ask an auditor to:
- Verify selected sales transactions against supporting documents.
- Check whether certain expenses meet specified criteria.
- Recalculate a particular financial metric.
- Verify the utilisation of a grant.
- Check selected balances against contracts and bank statements.
- Perform procedures over a specific financial information schedule.
The engagement is built around the question that the users actually need answered.
The key difference is the level and nature of assurance
Consider a company preparing for a potential acquisition.
The buyer may not immediately require a full statutory audit of a particular subsidiary. Instead, it may want specific procedures performed over revenue, debtors, inventory or selected expenses.
An AUP engagement may be appropriate if the parties agree on precisely what needs to be checked and how it should be checked.
The resulting report will describe the procedures performed and the factual findings.
It does not say:
“We believe the financial statements are fairly presented.”
That is the fundamental difference.
AUP is not automatically better because it is narrower
A common misconception is that an AUP is simply a more efficient audit.
That is not necessarily the case.
A narrower engagement may be more appropriate when the information requirement is narrow. But if stakeholders need assurance over the financial statements as a whole, an AUP does not replace an audit.
The question should therefore be:
What decision does the user of the report need to make?
If the answer requires an audit opinion, an audit remains the relevant engagement.
If the requirement is to establish specific factual findings over clearly defined areas, AUP may be more suitable.
Start with the purpose
Before deciding which engagement to use, management should consider:
- Who will use the report?
- What information do they need?
- What level of assurance do they require?
- Is the requirement broad or focused on specific matters?
- Are the procedures sufficiently clear for the findings to be useful?
These questions usually provide a better starting point than asking how much the engagement will cost.
The right engagement is the one that answers the right question
Audit and AUP are different tools.
An audit provides an independent opinion based on audit evidence obtained across the financial statements.
An AUP engagement reports factual findings from specifically agreed procedures.
Neither is inherently a substitute for the other.
For management, the useful question is not simply, “Can we do something cheaper than an audit?”
It is:
“What exactly do our stakeholders need to know, and what type of engagement gives them that information?”
That distinction can save time, avoid unnecessary work and, more importantly, ensure that the report produced is actually fit for its intended purpose.
Source: International Auditing and Assurance Standards Board, ISRS 4400 (Revised).