As a part of our professional work, we are often required to carry out Agreed upon Procedures (AUP). Let us have a look at what AUP mean, what approach is required while performance of AUP and what are applicable standards issued by ICAI.
AUP are different from regular audits, though they largely involve use of auditing techniques of data scrutiny and analysis. These are performed as per specific requirements of the clients. These can be to evaluate and analyse either part of clients financial statements (such as Accounts Receivable, Fixed Assets, Statutory liabilities, etc.) or the complete financial statements.
AUP have specific purpose with which they are performed. For e.g., in case of an Indian subsidiary of a foreign multinational company which finalises their consolidated financials as of year end (say 31 December 20x1), the parent company requests an Indian audit firm to carry out AUP for the complete financial statements of the subsidiary. In this case, AUP is an overall analytical review of the financials instead of a complete audit of the subsidiary. Scope of the AUP has to be clearly defined and also, the expected outcome (such as findings, observations, etc. which have to be given by the auditor in the form of a report) has to be defined before starting the AUP.
Applicable SRS/ AAS for AUP
ICAI has issued Standard on Related Services (SRS) 4400 (formerly AAS 32) that governs scope of the AUP to be performed by auditors on or after 1 April, 2004. Readers are also advised to refer the said SRS for more clarity.
As in case of any other engagement, auditor should issue an engagement letter to the client before starting the AUP, which must define the scope of AUP to be done. It must specify among other clauses:
1. Purpose for which the said AUP are being undertaken
2. That this is not an audit assignment. Accordingly, no assurance or review opinion would be expressed
3. List of procedures that will be performed during the AUP
4. Limitation on distribution of report of findings. If such limitation conflicts with a legal requirement, the auditor should not accept the assignment
5. Fee agreed to be charged for the assignment.
Planning and performance
Similar to any other audit assignment, planning plays a crucial role in AUP. The auditor should ensure that the complete audit (or AUP) programme is in place with responsibilities assigned to audit staff and target dates specified.
While performing AUP, scope limitation of the assignment being done vis--vis a full fledged audit has to be borne in mind and the field staff should strictly adhere to the AUP programme, unless any finding warrants widening the scope of AUP by in-depth checking.
Approach required in AUP is more analytical than regular audits where transaction checking forms a crucial part. Information should be obtained for various items in the financial statements in respect of which, procedures are to be performed. This mainly includes the following (this is an illustrative list and can be modified/ expanded to suit individual needs of each AUP).
1. Inquiring into movement in account balances such as share capital, investments, with appropriate supporting such as resolution of board of directors, return filed with MCA, etc.
2. Scrutinize movement in fixed assets with supporting for additions/ disposals (including profit/ loss on disposal), entries in FA register and provision of depreciation as per the accounting policy
3. Match revenue booked with major customer agreements (in case of a service company) or with excise records (in case of a manufacturing company). Reverse calculate revenue from services from Service Tax paid and also, cross verify the same with various returns filed with statutory authorities, such as STPI/ SEZ, etc. Compare sales in quantitative terms, if possible, with that of the previous year. Take cut off invoice number by which the last sale transaction is accounted for. Analyse increase/ decrease in revenue in comparison with the previous year revenue.
4. Verify debtors with confirmation from major debtors. Also, calculate the ratio for collection period from debtors and compare the same with that of the previous year
5. Verify bank balances with bank reconciliations and balance confirmations from banks
6. Verify inventory valuation with respect to accounting policy for the same. Check stock sheets of physical inventory verified by the management (if not attended by the auditor) to base the valuation
7. Compute material consumption ratio as a proportion of sales and compare the same vis--vis ratio for the previous year
8. Check employee cost with respect to number of average employees during the previous year and the current year. Based on this information compare the cost. Also, reverse calculate basic salary with respect to company's contribution to PF, etc.
9. In case of other expenses, compare the expenses for the AUP period with corresponding expenses for the previous year and obtain clarification on increase/ decrease beyond a normal percentage
It should be noted that all the procedures mentioned above are narrated assuming that a complete analysis of financial statements is required to be done without an in-depth review/ audit of any particular area in which case, analytical approach plays a very important role. It may, however happen that AUP may be required for specific areas and not the complete financial statements. In such cases, scope of AUP can match with complete audit of that particular area, such as revenue, debtors, etc.
Documentation and evidence
Since the auditor issues a report based on findings in AUP, it is crucial that his team keeps a sound documentation of all working papers prepared/ obtained during the AUP, similar to an audit. Similarly, audit evidence obtained during the course of AUP should also form part of the documentation.
Report for AUP should be given in agreed format as per terms of the engagement. The report should clearly specify the purpose with which the AUP were undertaken and the extent of procedures performed. It should also highlight the fact that no audit or review opinion is being expressed.
In several cases, the client requires a summary of exceptions observed/ major variations in account balances as compared to previous year balances with explanations for the same. If the terms of engagement require any other findings to be specified, the same should be mentioned in the report.