Agreed-upon procedures (AUP) engagements are one of the many services we offer at Hood & Strong. Because AUPs focus on a clearly defined scope, they can be more cost-effective and quicker to complete than a financial review or an audit. They're also versatile, since they can be used to address financial or operational matters alike. Here are answers to some of the questions we hear most often about AUPs.
What's an AUP Engagement?
In an AUP engagement, an independent accountant performs specific procedures on a particular subject matter, using established criteria to guide the work. Once the procedures are complete, the accountant issues a written report describing what was done and what was found.
That report also identifies:
- The subject matter and the criteria used to evaluate it
- The engagement's intended purpose
- The engaging party
- The responsible party
The responsible party is usually either the engaging party or the person or organization responsible for the underlying subject matter, though it isn't always easy to pin down. Under current attestation standards, the accountant isn't required to obtain a written assertion from the responsible party before starting an AUP engagement.
The report will also explain that:
- The engaging party has confirmed the procedures are appropriate for the engagement's intended purpose
- The accountant makes no representation about whether the procedures are appropriate for any other purpose
- The engagement wasn't an examination or review
- The accountant isn't expressing an opinion or conclusion, or providing assurance
Depending on the situation, use of the report may be restricted to specified parties, or it may be suitable for general use. Either way, the procedures themselves are always designed around the engagement's stated purpose.
What Do AUPs Cover?
AUPs rely on objective testing to address narrowly defined financial or operational questions. A few examples of areas an AUP might cover:
- Grant, regulatory, or franchise agreement compliance
- Verifying selected financial information during merger and acquisition due diligence
- Construction project progress and spending practices
- Royalty payments under a licensing agreement
Your Hood & Strong team can help develop or refine the procedures, but it's ultimately up to you, as the engaging party, to agree that they're appropriate for the report's purpose.
The procedures also need to be specific and objective enough to produce factual findings. For example, an accountant might inspect a set number of invoices to confirm they were properly approved. A request to determine whether an approval process is "adequate," on the other hand, would require judgment and a conclusion — which falls outside the scope of an AUP engagement. (See "AUPs in the Real World" sidebar below.)
How Do AUPs Differ From Consulting Engagements?
In an AUP engagement, we perform specified procedures and report the factual findings, including any exceptions. What we generally don't do is interpret those findings, judge whether they're favorable or unfavorable, or recommend corrective action.
A consulting engagement works differently. There, your advisors can analyze information, evaluate alternatives, and offer recommendations — and may even help you implement changes to improve your business processes.
For example, an AUP might test whether purchase orders included the required approvals. A consulting engagement might go a step further and evaluate the entire purchasing process, then recommend improvements to internal controls. Getting clear on the outcome you want is often the best way to figure out which service fits your circumstances.
Is an AUP Right for Your Situation?
AUPs can complement your annual financial statement reviews and audits, or stand on their own when an owner, lender, or other third party needs specific information tested. They tend to be a great fit when the intended users already understand the subject matter and simply want factual findings on a narrowly defined issue.
That said, an AUP may not be the right tool if you need an opinion on financial statements, assurance about specified information, or recommendations for improvement. Reach out to your Hood & Strong advisors to talk through what information you need, who will be using it, and which service makes the most sense for your situation.
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Sidebar: AUPs in the Real World
To help you understand how agreed-upon procedures (AUP) engagements work, consider this common use scenario. Your lender waives a loan covenant violation after your year-end audit but requires evidence that certain financial measures improve by the following June. Instead of requiring another full audit, the lender asks you to hire an independent accountant to perform AUPs.
In this situation, your business is both the engaging party and the responsible party, and the lender is the intended user. Based on the lender’s request, the accountant might:
§ Recalculate your debt-to-equity ratio at midyear,
§ Compare selected revenue figures with supporting invoices, and
§ Verify that required loan payments were made on time.
You, as the engaging party, acknowledge that these procedures are appropriate for the report’s purpose. Upon completion, the accountant issues a report describing the procedures performed and the findings, including any exceptions. The report doesn’t state whether your business is financially healthy or whether the lender should continue the waiver. Instead, the lender uses the AUP finding to make its decision.
