Agreed Upon Procedures and Consulting Engagements

MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC

What Type of Service?

Scenario Client needs fraud report, thinks someone is stealing cash

Scenario Client wants a comfort letter for a mortgage loan

Scenario Client needs a personal financial statement for bank loan

Scenario Client wants you to test inventory but nothing else

Scenario Client wants to issue an internal control report to a nonprofit board

Scenario The leadership of a church wants you to review how they collect and deposit funds each week

Engagement Letters are Important!

At a minimum, a write a memo describing what you have been asked to do.

Consider sending an email: "George, just to be clear, you have asked me to..."

Deciding Which Service to Provide

Will Third Parties Place Reliance on Your Work?

Are you adding credibility?

If Yes, Use AUP Option

If No, Use Consulting Option

Agreed Upon Procedures

Required wording in AUP report Follow attestation standards Tighter procedural requirements Less legal liability Usually at least three parties

Consulting
No particular wording Follow consulting standards More flexibility

Usually just two parties

Agreed Upon Procedures Engagements

Agreed Upon Procedures

Subject to Peer Review

Agreed Upon Procedures If specified party asks for procedures that are not well defined, consider whether or not you should accept the engagement.

AUP Engagement
Engagement letter not required

by AT standards but recommended. Consider attaching your procedures to the engagement letter.

AUP Planning
Get agreement from all parties. Consider drafting your report first

and providing it to all parties.

AUP Procedures
Be specific. Can procedure be reperformed? Make sure procedures satisfy

third party.

AUP Language
Responsible party - Person(s)

assuming responsibility for the subject matter Specified parties - Persons (entities) that assume responsibility for the sufficiency of the procedures

Poor AUP Examples

Read the minutes

Review invoices
Interview the accounts payable

clerk

Reperform with Same Result? If another person can perform the same procedure and get the same result, then you have a good procedure.

Poor AUP Example Reading the minutes What is your objective? Can another person perform the procedure and come to the same conclusion?

Good AUP Example

Agree every 25th check (from check

register) to an invoice agreeing amount, payee and date. Can another person perform the procedure and come to the same conclusion?

General procedures (e.g., Reading Minutes) expose a CPA to potential legal liability.

Minutes may touch on a fraudrelated issue that you are unaware of.

The Third party may want you to assume more responsibility.

Assuming more responsibility is fine, but make sure procedures are well defined.

AUP Report
Procedure
Finding Procedure

Finding

AUP Report

Too often AUP reports only reflect the procedure, but no finding.

AUP Planning If you provide a draft, mark it "Draft" and include language explaining:
Results

will depend on procedures. No additional procedures will be performed unless directed to do so.

Consulting Services

Consulting
Not subject to peer review

Consulting standards list six categories of services.

Consulting Services
Consultations - e.g., reviewing a

business plan Advisory services - e.g., assistance with strategic planning Implementation services - e.g., assistance with a merger

Consulting Services
Transaction services - e.g.,

litigation services Staff and other support services e.g., controllership services Product services - e.g., providing training services

Consulting Examples
Fraud investigation Internal control review Bankruptcy work Divorce settlement Controllership work

Consulting Characteristics
Generally nonrecurring
Specialized knowledge and skills to

provide the service More interaction with the client and can be broader than attest work Generally done just for the client

Consulting - Engagement Letter

If the nonattest service is for an attest client, Interpretation 101-3 of Rule 101 of the Code of Professional Conduct requires documentation of the understanding with the client.

Consulting - Engagement Letter The understanding can be in: 1. An engagement letter or 2.A memo

Consulting - Engagement Letter

If the CPA is providing only nonattest

services (e.g., consulting), then there is no professional standards requirement to have an engagement letter. Do so anyway - the written understanding will protect you.

Consulting - Workpapers
Consulting standards do not require

the consultant to prepare Workpapers. But, you should in most cases, prepare Workpapers. Workpapers are the link between your work and your report.

Consulting - Reports
Report format and content are up

to you and your client There is no opinion or other attestation reporting (e.g., compilation report or AUP report)

Consulting If no formal report (e.g., phone call where you discuss issues), consider a memo to the file to summarize your consultation.

Contact Information
Charles B. Hall, CPA, CFE, Macc McNair, McLemore, Middlebrooks & Co., LLC

chall@mmmcpa.com
Cpa-scribo.com (blog)