Definition
Agreed Upon Procedures (AUP) refers to a type of engagement in finance where the client and the auditor establish the procedures for the auditor to follow and report on. Unlike a standard audit, the auditor does not deliver an opinion or assurance, but only provides a report on the findings from the specified procedures. These procedures are usually used to provide comfort to third parties, such as banks or regulators.
Key Takeaways
- Agreed Upon Procedures (AUP) refer to specific procedures that an auditor or accountant is asked to perform on financial statements. They are requested by clients for specific reasons such as compliance with regulation, agreement with third parties, or other business needs.
- AUP’s are distinct from an audit or review because the auditor is not providing an opinion or assurance on the overall accuracy or completeness of the financial statements. The role of the auditor in AUP’s is to carry out the procedures agreed upon and report on the factual findings.
- Finally, the results of the Agreed Upon Procedures are typically reported in a specific format which includes a detailed description of the procedures performed, the factual findings, and any exceptions noted. However, the report does not include a conclusion or opinion by the auditor, as it would in an audit or review.
Importance
The finance term “Agreed Upon Procedures” (AUP) is important as it refers to a specific type of engagement wherein a certified public accountant is hired to perform specific tests and procedures and report on the results.
The procedures are not determined by the CPA, but are agreed upon by the involved parties – usually the client and a third party.
They provide a flexible way for businesses to select the individual services they require and create a sense of transparency and assurance.
This can be especially useful in situations such as verifying specific aspects of a financial statement, assessing compliance with certain regulations, or understanding the details of a complex transaction.
The importance of AUPs lies in its ability to deliver clear, factual findings tailored to specific business needs, enhancing credibility and supporting well-informed decision making.
Explanation
The primary purpose of Agreed Upon Procedures (AUP) is to carry out procedures of audit nature, over which the entity and the auditor agreed upon and generate factual findings. The auditor’s role is merely to carry out these procedures and report on the factual findings, rather than provide an opinion on the financial statements as a whole.
This tool is generally used when a company wants to analyze a specific area of its operations. It could be to investigate the validity of a certain financial data or evaluate the efficiency of an individual process within the company.
An AUP offers a substantial scope for customization according to the client’s specific needs. AUPs are typically used to provide comfort to third parties or meet specific regulatory requirements.
For instance, a regulatory body may want to verify the accuracy of certain aspects of a company’s activities, an investor might want more assurance about a particular area of a business before making an investment or a parent company could want an AUP on a subsidiary. It is always crucial that all involved parties have a clear understanding and agreement on the procedures and their purpose, to ensure the results serve the intended demand.
Examples of Agreed Upon Procedures
Auditing of Financial Statements: One of the most common instances of Agreed Upon Procedures (AUP) in the finance world involves the auditing of a company’s financial statements. Auditors follow a set of AUPs determined by an organization’s management and the auditing firm. These procedures could encompass reviewing financial transactions, verifying assets & liabilities, and ensuring compliance with regulations.
Due Diligence for Mergers & Acquisitions: In the process of a merger or acquisition, AUPs can be established for performing due diligence. The involved parties would clearly define the necessary steps to validate the financial condition of the target company. This may include reviewing business contracts, assessing liabilities, and confirming the accuracy of financial records.
Verification of Insurance Claims: In the insurance industry, AUPs are often used to verify the validity of insurance claims. For instance, in the case of a car accident claim, procedures may involve a thorough examination of the accident report, testimonials, cost of repairs and adherence to policy terms. Here, AUP is essential to enforce regulations and prevent fraudulent claims.
FAQs: Agreed Upon Procedures
What are Agreed Upon Procedures?
Agreed Upon Procedures (AUPs) are a type of engagement undertaken by accountants at the request of a client. The accountant carries out specific tests and procedures and reports on the findings without providing any assurance or opinion.
Are Agreed Upon Procedures the same as an audit?
No, Agreed Upon Procedures are not the same as an audit. While both involve an accountant reviewing certain aspects of a business, an audit provides assurance on financial information while Agreed Upon Procedures only involves reporting factual findings from specific procedures.
When might Agreed Upon Procedures be used?
Agreed Upon Procedures can be used in a variety of situations, including to verify specific information during a merger or acquisition, to confirm contractual obligations are being met, or to provide a third-party verification of specific information.
Who can request Agreed Upon Procedures?
Typically, Agreed Upon Procedures are requested by the management of a company, but they can also be requested by third parties, such as banks, regulatory bodies, or potential investors, depending on the situation.
What happens after the Agreed Upon Procedures are carried out?
After the Agreed Upon Procedures are carried out, the accountant produces a report detailing the procedures carried out and the findings. This report is then given to the client and, if applicable, any third parties who have requested it.
Related Entrepreneurship Terms
- Independent Accountant
- Engagement Letter
- Financial Statements
- Compliance Testing
- Specified Procedures
Sources for More Information
- American Institute of Certified Public Accountants (AICPA): A professional organization for certified public accountants that provides a range of resources including standards and guides for agreed upon procedures.
- International Federation of Accountants (IFAC): An global organization for the accountancy profession that publishes international standards, including those related to agreed upon procedures.
- Ernst & Young (EY): A global leader in assurance, tax, transaction and advisory services that provides professional insights about agreed upon procedures.
- PricewaterhouseCoopers (PwC): A multinational professional services network providing comprehensive consulting and advisory services including subjects on agreed upon procedures.
