Increased audit exemption thresholds internationally have prompted stakeholders to look for alternative services to an audit. This article explores the growing use of agreed-upon procedure (AUP) engagements as a means of filling the gap
As financial reporting and other forms of external reporting have evolved, there has been recognition that users’ needs for enhanced credibility over certain identified subject matters and subject matter information could be met by different types of external professional services beyond traditional audit and assurance services, including, among other services, agreed-upon procedure (AUP) engagements.
On 29 November 2016, the International Auditing and Assurance Standards Board (IAASB) issued the Discussion Paper: Exploring the Demand for Agreed-Upon Procedures Engagements and Other Services, and the Implications for the IAASB’s International Standards (Discussion Paper).1
The intention with the issue of the discussion paper was, first, for the IAASB to obtain an understanding of the current use of AUP engagements, the implications for standard-setting by the IAASB and, in particular, the extent to which the extant standard, namely ISRS 4400,2 is helpful in undertaking an AUP engagement and producing an AUP report that is valued by users. And second, to explore the demand for multi-scope engagements to meet the emerging information needs of users.
What is an AUP engagement?
An AUP engagement is defined as an engagement in which an auditor is engaged to carry out those procedures of an audit nature to which the auditor and entity and any appropriate third parties have agreed and to report on factual findings.3 This definition is echoed as the objective to an AUP engagement in ISRS 4400.4
There are two distinct types of engagements covered by the Standards of the IAASB, namely assurance engagements and related services engagements5 with an AUP engagement falling within the scope of the latter type of engagement. An important distinction between an AUP engagement and assurance engagements is that under an AUP engagement, no assurance is expressed; instead the user of the AUP report is required to draw their own conclusion based on the procedures performed and findings thereof as reported on by the practitioner.6
Current demand for AUP engagements
Based on the research and outreach performed by the IAASB, the demand for AUP engagements is on the rise. The reasons cited for this increase are twofold: first there are calls for increased accountability around funding and grants and second, changes in regulations internationally, including a trend to relax the requirements for entities to have an audit.7 Although no assurance conclusion/opinion is ultimately expressed in an AUP engagement, this is still seen as a cost-effective way of supporting credibility and trust in the reported subject matter information.8
This means that credibility may be enhanced by an AUP engagement in the context that the users of the AUP report and the related subject matter information will derive a level of comfort and credibility from the work that was performed, who performed the work, and the factual findings that resulted from the work performed. However, this must be understood in the context that an AUP engagement is a special purpose engagement where the agreed-upon procedures relating to the particular engagement have been tailored to meet the specific needs of specific users in the circumstances as opposed to satisfying general purpose requirements.
The above changes to the business and regulatory environment have also resulted in the emergence of the concept of a multi-scope engagement.
What is a multi-scope engagement?
A multi-scope engagement – also referred to as a hybrid engagement – is a single engagement that draws on the requirements of various IAASB pronouncements. Common examples of multi-scope engagements include engagements that combine reasonable assurance engagements, limited assurance engagements and non-assurance engagements; or engagements mandated by regulators.
In South Africa, multi-scope engagements have emerged mainly as a result of regulatory requirements. Examples of such engagements include those performed in compliance with:
- The Financial Markets Act and JSE Directive DG1.7 (Annual Stockbroker’s Audit Report),9 and
- The Banks Act 94 of 1990 and Regulation 46 of The Regulations Relating to Banks (Reports to the Registrar of Banks on the Statutory Returns)10
In other instances, practitioners are being innovative in responding to stakeholder needs in combining an AUP engagement with an assurance engagement,11 a compilation engagement,12 or an independent review engagement.13
The IAASB Project
The IAASB has undertaken a project to revise the extant ISRS 4400 in response to calls from small and medium practices (SMPs) and other stakeholders as a result of the increase in the use of AUP engagements.14
This project is of particular interest in South Africa. Here, the use of AUP engagements is prevalent in relation to certain identified information needs of regulators, grantors, funding bodies, creditors and other entities. The increased demand for such engagements has also been particularly prompted in SMPs where the impact of the relaxation of the statutory requirements for an entity to have an audit has been the most prominent.
The discussion paper highlights practical challenges around the application of the extant ISRS 4400 and identifies eight key areas of focus for the project that have been identified based on research and outreach performed to date:
- The role of professional judgement and professional scepticism in an AUP engagement
- The independence of the professional accountant
- Terminology in describing procedures and reporting factual findings in an AUP report
- AUP engagements on non-financial information
- Using the work of an expert
- Format of the AUP report
- AUP report restrictions, and
- Recommendations made in conjunction with AUP engagements15
Where to from here
The European Federation of Accountants and Auditors (EFAA) are supportive of the IAASB’s project on AUP engagements as they see potential for this type of engagement to offer real value, specifically in the SME environment.16 The EFAA are of the view that the success of this project is dependent on the drafting of a revised standard that is principles based, thereby providing guidance that allows for room for innovation.17
SAICA shares the view of the EFAA in that AUP engagements are seen as an area where real value add in terms of enhancing credibility and trust in reported information, both financial and non-financial, can be achieved. This view, along with other insight obtained through local outreach activities were shared in the SAICA comment letter submitted to the IAASB in response to the discussion paper.18 SAICA believes it is appropriate that the IAASB consider revising ISRS 4400 in response to the broader calls for a clearer and more robust standard in light of the growing demand for AUP engagements. The comment period closed on 29 March 2017 and the IAASB is currently deliberating the next step based on the input received from this outreach.
AUTHOR: Hayley Barker Hoogwerf CA(SA) is Project Director: Assurance at SAICA
1 The discussion paper can be downloaded from https://www.ifac.org/publications-resources/discussion-paper-exploring-demand-agreed-upon-procedures-engagements-and.
2 ISRS 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information.
3 Glossary of terms.
4 ISRS 4400.4.
5 International Framework for Assurance Engagements, Appendix 1.
6 ISRS 4400.5.
7 Discussion paper, paragraph 2.
8 The discussion paper expands on why AUP engagements are valued in paragraph 3.
9 Illustrative report is available on the IRBA website: https://www.irba.co.za/industry-specific-guides-and-regulatory-reports-pages/jse-related-engagements.
10 Illustrative report is available on the IRBA website: https://www.irba.co.za/industry-specific-guides-and-regulatory-reports-pages/registrar-of-banks-in-terms-of-the-regulations-to-the-banks-act.
11 Audits of Historical Financial Information as covered by ISA 100 – 999, International Standards on Auditing; or Other Assurance Engagements as covered by ISAE 3000 – 3699, International Standards on Assurance Engagements.
12 ISRS 4410 (Revised), Compilation Engagements.
13 ISRE 2400 (Revised), Engagements to Review Historical Financial Statements; or ISRE 2410, Review of Interim Financial Information by the Independent Auditor of the Entity.
14 Discussion paper, paragraph 4.
15 Discussion paper, paragraph 8.
16 Bodo Richardt and Paul Thompson, 2017, Building Trust through Agreed-Upon Procedures, http://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/building-trust-through-agreed-upon-procedures (accessed 3 April 2017).
17 Op cit.
18 All comment letters submitted to the IAASB can be accessed on the IAASB website: http://www.ifac.org/publications-resources/discussion-paper-exploring-demand-agreed-upon-procedures-engagements-and.