What is the difference between agreed-upon procedures engagement and assurance engagement?

 

Agreed-upon procedures is one of the services rendered by audit companies. The nature of this service differs from an audit and other assurance engagements.

Assurance engagement is an engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information (that is, the outcome of the measurement or evaluation of an underlying subject matter against criteria).

Agreed upon procedures are procedures that have been agreed to by the practitioner and engaging party. The practitioner communicates the agreed upon procedures performed and findings in the agreed-upon procedures report. The agreed-upon procedures report does not provide the practitioner’s conclusion; the engaging party and other users of the report draw their own conclusions from the work performed by the practitioner. An example of the agreed-upon procedures could be procedures performed by practitioner to determine whether the procurement of some products is compliant with the entity (engaging party) procurements policy.

 Agreed-upon procedures engagement is engagement in which the practitioner is engaged to carry out agreed procedures and communicate these procedures and related findings to engaging party in agreed- upon procedures report.

Agreed-upon procedures engagement is not an audit, review or other assurance engagement. An agreed-upon procedure engagement does not involve obtaining evidence for the purpose of expressing an opinion or conclusion in any form.

But like any assurance engagement the performance of an agreed-upon procedures engagement by audit companies assumes of availability of such elements as:

·        Engagement acceptance and continuation.

·        Compliance with relevant ethical requirements.

·        Planning.

·       Procedures applied in engagement (Inquiry, Observation, Inspection, Obtaining confirmations, Recalculation).

·        Using the work of management or practitioner`s expert (if needed).

·        Documentation.

·        Preparing report.

·        Engagement level quality control.

The objectives of the practitioner in an agreed-upon procedures engagement are:

·        Agree with the engaging party about the procedures to be performed.

·        Perform the agreed-upon procedures.

·        Communicate the agreed-upon procedures and related findings to the engaging party.

Examples of subject matters on which the agreed-upon procedures may be performed.

Agreed-upon procedures may be performed on financial and non-financial subject matters.

Examples of financial subject matters include subject matters relating to:

·   The entity`s financial statements or specific classes of transactions, account balances or disclosures within the financial statements

·        Eligibility of expenditures claimed from a funding program.

·        Capital adequacy ratios for regulatory authorities.

·        Revenue for determining royalties, rent or franchise fee.

Examples of non-financial subject matters include subject matters relating to:

·        Numbers of passengers reported to a civil aviation authority.

·        Observation of distraction of defected goods reported to a regulatory authority.

·        Data generating process for lottery draw reported to a regulatory authority.

·        The volume of greenhouse emission reported to a regulatory authority.

Engagement acceptance and continuation

The practitioner accepts or continues the agreed-upon engagement under the following conditions:

·       The engaging party acknowledges that the engagement procedures to be performed are appropriate for the purpose of the engagement.

·        The practitioner expects to be able to obtain the information necessary to perform the agreed-upon procedures.

·        The agreed-upon procedures and related findings can be described objectively and in clear ways.

·    The practitioner has no reason to believe that relevant ethical requirements and independence requirements will not be complied with

Procedures applied in the engagement to perform agreed-upon procedures.

The procedures applied in an engagement to perform agreed-upon procedures may include the following: 

● Inquiry and analysis. Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the company or outside the company

● Recalculation, comparison, and other clerical accuracy checks.

● Observation. Observation consists of looking at a process or procedure being performed by others within the entity.

● Inspection. Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.

● Obtaining confirmations. External Confirmation represents audit evidence obtained by the practitioner as a direct written response to the practitioner from a third party.

Using the work of practitioner`s expert in the engagement to perform the agreed-upon procedures.

In some situation the performance of the agreed-upon procedures engagement requires the use of expert`s work.

The practitioner`s expert may assist the practitioner in the following directions:

1.      Discussing with engaging party the agreed-upon procedures to be performed.

2.      Performing one or more agreed-upon procedures.

If the work of practitioner`s expert be used in the engagement to perform the agreed-upon procedures the following procedures must be followed:

·        Evaluation of the competence, capability, and objectivity of the practitioner`s expert.

·        Agreement with the practitioner`s expert on the nature, scope, and objectivities of expert`s work.

·        Determination whether the nature and the extent of work performed by the practitioner`s expert is consistent with the work agreed with this expert.

·   Determination whether the findings are adequately described taking into account the work performed by the practitioner`s expert.

A practitioner expert may be an external expert engaged by the practitioner or an internal expert who is a part of the firm and subject to the firm`s system of quality control.

Sometimes, law and regulation may require a reference in the agreed-upon procedures report to the practitioner`s expert who performed any of the agreed-upon procedures. However, the practitioner has the sole responsibility for the findings included in the agreed-upon procedures report and that responsibility is not reduced by the use of the practitioner expert.

Documentation related to the agreed-upon procedures engagement.

Like any assurance engagement the performance of an agreed-upon procedures engagement should be documented

The following information should be included in the engagement documentation related to the agreed-upon procedures:

·        The written terms of the engagement.

·      The nature, timing and extent of the agreed-upon procedures performed. This may include the following records of the practitioner (the identifying characteristics of subject matters on which the agreed-upon procedures performed, who performed the agreed-upon procedures and the date such procedures were performed, who reviewed these procedures and the date when they are reviewed).

·        The findings resulting from the agreed-upon procedures performed.

Agreed-upon procedures report.

The final stage of the agreed-upon procedures engagement is the agreed-upon procedures report.

The agreed-upon procedures report is designed to communicate the agreed-upon procedures performed and related findings to the engaging party. This report is prepaid in writing and contains the following information:

·        A title.

·        An addressee.

·   Identification of subject matter on which the agreed-upon procedures performed (the purpose of agreed-upon procedures report).

·        Responsibilities of the engaging party.

·        Responsibilities of practitioner.

·     A statement that practitioner complies with the ethical requirements and the firm of which the practitioner is a member applies the ISQC1.

·        Procedures and findings.

·        Practitioner`s signature.

·        Date of report.

·        Practitioner’s address.

In conclusion, agreed-upon procedures is one of the services rendered by audit companies. This service differs from the audit and other assurance engagements, but it could be helpful for entities because they may obtain detailed procedures performed on agreed subject matters and finding related to these procedures in the agreed-upon procedures report.