Consulting or agreed upon procedures–which should a CPA use?
I am often asked, “should this be an agreed-upon-procedures (AUP) engagement or a consulting engagement?” (The question usually comes just after a client says, “I don’t need an audit. They cost too much.”)
So what’s the difference in an AUP and a consulting engagement?
Agreed Upon Procedures Engagement
The AUP option is more precise and is mainly composed of:
An example follows:
Procedure – Agreed all January 2012 disbursements greater than $20,000 to checks that cleared the bank statement; compared the payee on each check to 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.
A consulting engagement–based on the AICPA Consulting Standards–is less precise and does not necessarily need to follow the procedure-finding format. There are no specific reporting standards for a consulting engagement, so a CPA can more easily design the engagement to meet various needs. The consulting standards are more flexible than the attestation standards (and the requirements for agreed-upon-procedures engagements).
A consulting report might address the following:
- Reading of minutes
- Interviews of individual employees
- Flowcharting of internal controls
- Summary of production statistics
- Narrative of business goals and enterprise risks
As you can tell, there are no procedures and findings.
Which is Best?
It all depends on the purpose of the report. Consider the following:
- Will there be external parties (e.g. creditors) placing reliance on the report?
- 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 use the AUP option.
If there is no third party relying on the information, then a consulting engagement may be better. 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 in performing an AUP is specificity.
Procedures that would not be appropriate include:
- General review of inventory internal controls
- Reading the minutes
- Testing accounts payable
Procedures that would be appropriate include:
- Examine every fifth journal entry in the month of May 2017 to determine if each is signed by the CFO.
- Agree each balance on the May 2017 balance sheet to the general ledger.
Clarified AUP Guidance
For the new AICPA AUP guidance (including sample reports), click here. These standards are effective for reports dated on or after May 1, 2017.
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