Agreed-Upon Procedures

A growing manufacturing company seeks to secure a critical line of credit, but the lender raises concerns about its accounts receivable balances. To address this, the company opts for an agreed-upon procedures engagement, focusing on an independent firm verifying specific data without the need for a full audit. This streamlined approach satisfies the lender’s requirements and enables the business to move forward efficiently. In this article, we explore the fundamentals of agreed-upon procedures, their differences from audits, benefits, and practical applications.

What Are Agreed-Upon Procedures?

Agreed-upon procedures (AUP) are engagements where an independent auditor performs specific procedures on financial or non-financial data as requested by the client and any third parties involved. These procedures are customized to meet the client’s needs and result in a report that presents factual findings without offering assurance or opinions.

For instance, a company considering an acquisition might request a firm to perform agreed-upon procedures to verify critical financial metrics, such as revenue recognition practices or inventory balances. The resulting report provides the firm’s findings, enabling stakeholders to interpret the data and draw their own conclusions.

AUP engagements are conducted under AICPA standards on attestation engagements, which ensures consistency and reliability in the reporting process. The scope and depth of the procedures are collaboratively determined to align with the objectives of all involved parties.

Key Differences Between Agreed-Upon Procedures and Audits

While both agreed-upon procedures and audits involve independent review by qualified professionals, their purposes and scopes differ significantly.

1. Scope and Focus:
   1. Audit: Broad in scope, covering the entirety of a company’s financial statements to assess whether they present a true and fair view.
   1. AUP: Narrowly focused on specific areas or transactions as agreed upon by parties on both sides.
2. Outcome:
   1. Audit: Provides an opinion on the financial statements.
   1. AUP: Offers factual findings without assurance or interpretation.
3. Cost and Time:
   1. Audit: More expensive and time-consuming due to its comprehensive nature.
   1. AUP: Generally quicker and more cost-effective because of its targeted approach.
4. Use of Report:
   1. Audit: Intended for a broad audience, including investors, lenders, and regulators.
   1. AUP: Restricted to the parties who agreed upon the procedures, ensuring confidentiality.
5. Fraud Detection:
   1. Audit: May uncover fraud or material misstatements during the process.
   1. AUP: Not designed to detect fraud but may incidentally identify irregularities.

The Benefits of Agreed-Upon Procedures

Agreed-upon procedures engagements provide numerous advantages for businesses looking to gain clarity in specific areas without the burden of a full audit.

1. Customization and Relevance: AUP engagements are highly flexible, allowing businesses to focus on their unique needs. For instance, a retail chain might request AUPs to verify inventory levels across multiple locations before a year-end financial review.
2. Cost-Effectiveness: By limiting the scope to specific concerns, businesses save costs with an AUP compared to a full-scale audit. This is especially beneficial for small and medium-sized enterprises.  Also, a full scale audit may not even address the area of concern.
3. Targeted Insights: The focused nature of AUPs ensures that businesses receive detailed insights into the areas of interest. This precision can be invaluable for addressing specific questions or concerns.
4. Reduced Disruption: Unlike audits, which require extensive access to personnel and records, AUP engagements are less intrusive and quicker, minimizing disruption to daily operations.
5. Enhanced Credibility: The findings from an agreed-upon procedures report can provide third-party validation, fostering trust among the parties. The distribution is limited to the parties, so outsiders cannot see it.
6. Facilitates Risk Management: AUPs help identify risks in particular areas, enabling businesses to take corrective actions proactively.
7. Supports Decision-Making: By providing clarity on specific matters, AUPs empower management to make informed strategic decisions.

How Agreed-Upon Procedures Help Businesses

Agreed-upon procedures are not only a cost-effective alternative to audits but also a strategic tool for addressing business challenges. They provide actionable insights in various scenarios, such as compliance, transaction verification, and internal controls assessment.

1. Mergers and Acquisitions: In M&A transactions, agreed-upon procedures are used to validate specific financial data, such as revenue streams or outstanding liabilities, ensuring both parties have accurate information for negotiations.
2. Regulatory Compliance: Businesses operating in heavily regulated industries, such as healthcare or finance, often use AUPs to demonstrate compliance with specific requirements.
3. Internal Controls Assessment: Companies aiming to strengthen their internal controls might use AUPs to evaluate processes such as payroll, procurement, or expense reporting.
4. Grant Compliance: Nonprofit organizations receiving grants may employ AUPs to verify that funds are used as intended, satisfying donor or regulatory requirements.
5. Contractual Obligations: Agreed-upon procedures can confirm compliance with contractual terms, such as royalty agreements or lease conditions.
6. Fraud Investigations: While not designed to detect fraud, AUPs can be instrumental in pinpointing anomalies or discrepancies that warrant further investigation.

Conclusion

Agreed-upon procedures are a powerful tool for businesses seeking tailored insights into specific areas of their operations. By focusing on targeted procedures, AUPs provide cost-effective, actionable findings that can enhance decision-making, support compliance, and build stakeholder confidence.

Whether addressing a lender’s concern, preparing for a merger, or assessing internal controls, businesses can leverage the flexibility and precision of AUPs to meet their unique needs. When carefully planned and executed, an agreed-upon procedures engagement can serve as a strategic asset in navigating today’s complex business landscape.