Consulting or Agreed Upon Procedures Engagement: Which is Best?

By Charles Hall | Accounting and Auditing

Apr 05

Consulting or agreed upon procedures–which should a CPA use?

Consulting or agreed upon procedures

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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:

  1. Procedures
  2. Findings

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.

Consulting Engagement

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:

  1. Reading of minutes
  2. Interviews of individual 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 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 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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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.

Leave a Comment:

(9) comments

Armando Balbin June 12, 2014

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.

Reply
Benson Dana April 5, 2017

A good simple basic article. Thanks. It was helpful. I especially likes Armando’s comment. We need to share more stories like that with each other.

Reply
Charles Hall April 5, 2017

Thanks Benson. Armando always has good insights. Yes, such stories do provide context for understanding.

Reply
CPA needs answers September 15, 2017

If a state agency requires an AUP report on clients schedule of qualified expenditures for tax credit purposes, however requires the schedule be corrected for any findings prior to it being submitted with the AUP report, then are there any findings? All findings have been corrected – seems listing them would be a moot point…..

Reply
Charles Hall September 15, 2017

I agree. Doesn’t make sense that a state would do this. The AUP report should be issued with the noted mistakes (though obviously, I can’t tell a state what to do).

Reply
CPA needs answers September 15, 2017

The state kicks the report out when the original client expenditure schedule is submitted with an AUP report noting the exceptions. They kick back to the CPA claiming CPA made errors – although errors are all noted in report. So we had to give expenditure schedule back to client to update for all errors and then will resubmit report. So errors are now gone. So you think that second report then should not have any findings even though we did originally have findings?

Reply
Charles Hall September 15, 2017

I can’t say whether it’s right or wrong, but I’d be hesitant to provide this type of service. It makes the entity appear as though they performed better than they really did.

Reply
JAMES NEWHARD August 28, 2018

I have done a great many AUPs, most often applied to a local tax jurisdiction with regards to taxpayer compliance with the self-assessment of character of reporting “gross receipts” pertaining to taxability and character (with regards to applicable different tax rates). The report intends to provide credibility to compliance and quantify findings of discrepancy (plus or minus). Surprisingly, many CPAs have done these type of engagements as consulting engagements even though the report is intended to be authoritative as to compliance and must quantify findings (upon which the taxing jurisdiction assesses additional taxpayer tax or grants them credit, depending on the findings). It appears that many CPAs think that attest or nonattest service is at the discretion of the CPA! I would like to see the profession provide more direction and clarity of professional responsibilities in cases like these, even if it turns out that my perspective was inaccurate.

Reply
Charles Hall August 28, 2018

James, there continues to be a great deal of confusion regarding when AUPs should be performed and when consulting engagements should be performed. Usually, if the report goes to a third party, I use the AUP option.

Reply
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