Gain Valuable Insight With an Agreed Upon Procedures (AUP) Engagement

by: Smith and Howard

October 25, 2016

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When Mark, an experienced banker, received the 2015 year-end financial statements for Amped Up, an electrical subcontractor, he felt like something wasn’t quite right. Inventory had grown substantially over the last three years and the company’s profit margin had deteriorated. Additionally, the borrower had nearly maxed out its $1 million line of credit.

Mark identified several options. He could call the credit line, thereby adding to the borrower’s problems. He could ask the borrower to upgrade from reviewed financial statements to audited financial statements. Or he could gather more information through an “agreed upon procedures” (AUP) procedures engagement. Mark chose the last option. Here’s why.

A customized approach

An AUP engagement uses similar procedures to an audit, but on a smaller and limited scale and with no assurance on the part of the CPA. In the hypothetical case, Mark met with Amped Up’s CPA to discuss his specific concerns. They defined the scope of the engagement and selected the procedures to be performed. Specifically, Mark asked the CPA to independently count the company’s inventory, including jobs that were in progress, and reconcile that count to its perpetual inventory records.

When these procedures were completed, the CPA presented her findings to Mark. From there, Mark and his supervisors at the bank decided on the next course of action, based on those findings.

AUP vs. audit

Although the American Institute of Certified Public Accountants (AICPA) regulates both audits and AUP engagements, the nature of these two types of accounting services are actually quite different. When a CPA firm performs an audit, its client is the borrower. With an AUP engagement, the client is typically the banker — a fact that usually alleviates potential conflicts of interest.

Another key difference is that of responsibility. Audits require CPAs to provide a formal opinion on whether the company’s financial statements have been prepared in accordance with Generally Accepted Accounting Principles.

On the other hand, CPAs make no formal conclusions when performing AUPs; they simply act as “finders of fact.” It is the client’s responsibility to draw conclusions based on the CPA’s findings.

Potential upsides

AUPs also boast several advantages over audits. They can be performed at any time during the year — not just at year end. And because you have the flexibility to choose only those procedures you feel are necessary, they can be cost-effective. So, if you have doubts or questions about a borrower’s financials, AUP engagements can resolve issues quickly and effectively.

In the case of Amped Up, the AUP engagement revealed several issues. First and foremost, the company’s controller, the owner’s 22-year-old son, was unfamiliar with percentage of completion accounting. So, the CPA provided some guidance to get the accounting records back on track. In addition, one of the company’s electricians had been pilfering parts for his side business. Management was shocked by the findings of the AUP engagement and fired the dishonest worker.

Added protection

This example shows how an AUP engagement can be used to dig deeper into financial results and identify specific problems that require immediate action. If a borrower’s year end financials seem awry, consider hiring a CPA to perform an AUP engagement to help protect your collateral.

For more information on how an AUP can help you, contact Paul Atkinson at 404-874-6244 or fill out our form below.

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