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.

Please note: I reserve the right to delete comments that are offensive or off-topic.

Leave a Reply

Your email address will not be published. Required fields are marked *

One thought on “Consulting or Agreed Upon Procedures (AUP) Engagement?

  1. I have been performing AUP mainly on not-for-profit for many years. It is an effective way to save money when the NFP is not required to perform an audit. Grantors can save money when the NFP is not required to have the Single Audit, or not having an audit, or even when audited, they (grantors) like to get deeper into how their grant funds were expensed and getting an understanding of the grantee’s internal control. In the past one of the most frequent problem area for NFPs receiving grant funds, is not paying the payroll taxes. Therefore, determining whether the NFP paid the grant’s share of the payroll taxes became one of the procedures that they want to apply.
    An interesting situation while engaged by a big city to perform fiscal monitoring (AUP) to its grantees. NFP “XYZ” a multiple funded, diversified, big budget, respected in the city was one of those city grantees. We were engaged to perform an AUP. We asked to see the payroll tax payments to the IRS. They provided us with checks issued and deposited into a payroll tax bank AC that amounted to the grant payroll tax share of the grant on which we were performing AUP. When I asked to see that bank AC and see the actual payments to the IRS, I was denied access on the basis that it included all other programs and grants that we had no right to access. My reply was that the response given to me was correct from a general point of view as a principle. However, if they planned to restrict access then they should have kept the City’s grant payroll records separately so we could be tested. It has no effect, they still denied access. At that point, I said I am stopping my work, getting back to the City Audit Department. The City response was that they agreed with our position, that in such situation they were obligated to show all records, that it was transferred to the City Legal Department to force the grantee to show the records. A week or so later, the City received a communication from the IRS that the grantee was not paying the payroll taxes.