Consulting or Agreed Upon Procedures (AUP) Engagement?

Through the years I have often been asked “should this be an agreed upon procedures (AUP) engagement or a consulting engagement?” (This usually happens just after a client says “I don’t need an audit; they are so costly.”)

So what’s the difference in an AUP and a consulting engagement?

AUP Engagement

The AUP option is more precise and is mainly composed of:

  1. Procedures
  2. Findings

An example follows:

Procedure – Agreed all January, 2012 disbursements greater than $20,000 to a checks that cleared the bank statement; compared the check payee and the payee per the check register.

Finding – All check payees agreed with the exception of check # 2394 for $45,000; the payee for this check was I. Cheatum ¬†and the check register reflected a payment to King’s Supply Company.

Consulting Engagement

A consulting engagement is generally less precise and does not necessarily need to follow the procedure-finding reporting format. There are no specific reporting standards for a consulting engagement, so the CPA can more easily design a report to meet his or her client’s needs. It provides more flexibility.

A consulting report might address the following:

  1. Reading of minutes
  2. Interviews of certain employees
  3. Flowcharting of internal controls
  4. Summary of production statistics
  5. Narrative of business goals and enterprise risks

As you can tell, there are no procedures and findings.

Which Option is Best?

It all depends on the purpose of the report. Consider the following:

  1. Will there be external parties (e.g. creditors) placing reliance on the report?
  2. Is the purpose of the report to add credibility to the information (by having the CPA attest to procedures and findings)?

If the answer to these questions is yes, then you probably will use the AUP option.

There are reporting standards for AUP engagements, so the report language is more standardized and, as we said before, the report should, in its body, contain specific procedures and findings.

If there is no third party relying on the information, then the consulting arrangement may be better. It definitely allows the CPA more flexibility in meeting the needs of the client. But always ask “who will receive the report?” The CPA needs to know who will read and potentially place reliance upon the report.

AUP Procedures (Not Appropriate and Appropriate)

The key consideration for the CPA performing an AUP is specificity.

Procedures that would not be appropriate include:

  • General review of inventory internal controls
  • Reading the minutes
  • Testing accounts payable

Ask yourself “can another person perform this procedure without someone explaining the particulars to them?” If no, then the procedure is not well designed.

Procedures that would be appropriate include:

  • Examine every tenth journal entry in the month of May, 2012 to determine if it is signed by the CFO.
  • Agree each balance on the May, 2012 balance sheet to the general ledger.

These procedures can easily be performed by a second person without explaining what needs to be done.

More Information

You can also see my slide presentation that provides more information about this topic.

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