3 November 2021

Why a new standard?

A wide range of stakeholders use Agreed-Upon Procedure (AUP) reports for various reasons. The demand for AUP engagements continues to grow, particularly with the need for increased accountability around funding and grants.

In addition, regulation changes have also driven increased demand for AUP engagements, especially from smaller entities, as increased audit costs and higher thresholds for statutory audit prompt stakeholders to look for alternative services to an audit (e.g. banks may request AUP engagements on receivables and inventory instead of audited financial statements of borrowers).

The new standard is designed to address the needs of regulators, funding bodies, creditors, and other entities for increased accountability around the use of funds, grants, and other financial and non-financial subject matters by:

  • Broadening the scope to include financial and non-financial subject matters.
  • Adding examples of AUP engagements.
  • Clarifying the role professional judgment plays in an AUP engagement.
  • Including explanations on the distinctions between AUP engagements and assurance engagements, and
  • Highlighting the practitioner’s responsibilities under relevant ethical requirements for dealing with fraud and non-compliance with laws and regulations.

The rest of the article focuses on the key revisions to ISRS (NZ) 4400 compared to APS-1.

Professional Judgment and the Practitioner’s Objectivity and Independence

The standard concludes that professional judgment is not suspended in an AUP engagement (paragraph 18). However, applying professional judgment when performing procedures in an AUP engagement differs from an assurance engagement.

Professional judgment is applied in accepting and conducting an AUP engagement, for example in determining appropriate actions if the practitioner becomes aware of facts or circumstances suggesting that the procedures are inappropriate for the purpose of the agreed-upon procedures engagement (paragraph A22).

Once procedures are clearly defined, professional judgement is still to be exercised in matters that may indicate fraud or an instance of non-compliance or suspected noncompliance with laws or regulations, or where doubt may be cast on the integrity of the information relevant to the AUP engagement or that indicate that the information may be misleading.

The AUP engagement is performed by an objective practitioner, which means a practitioner’s professional or business judgment is not compromised (paragraph A14).

The standard gives the practitioner flexibility to address circumstances even when the engaging party practitioner is not independent of the entity.  However, the emphasis is now placed on transparency regarding the practitioner’s independence.

Engagement Acceptance and Continuance

The extant APS-1 sets out requirements and guidance dealing with the terms of the engagement. However, it does not contain any requirements or application material on conditions required to be met before the practitioner can accept an AUP engagement.

ISRS (NZ) 4400 sets out engagement acceptance and continuance conditions in paragraphs 20-21 and A20-A29. These paragraphs reinforce the unique characteristics of an AUP engagement, namely:

  • That the engaging party acknowledges expected procedures performed by the practitioner are appropriate for the engagement; and
  • That the AUP and related findings can be described objectively, in terms that are clear, not misleading, and not subject to varying interpretations.

Practitioner’s Expert

The extant APS-1 does not deal with the use of an expert. The new standard includes requirements and application material to address the use of the work of a practitioner’s expert in an AUP engagement, including the practitioner’s responsibilities when using the work of a practitioner’s expert and consideration of whether it is appropriate to include references to a practitioner’s expert in the AUP report.

The IAASB believes that a practitioner’s expert can appropriately assist the practitioner within the context of an AUP engagement by applying the expert’s competence and capabilities. ISRS (NZ) 4400 includes examples of how a practitioner’s expert can assist the practitioner in an AUP engagement, such as a chemist determining the toxin levels in a sample of grains.

AUP Report Restrictions and Non-Financial Subject Matters

The previous standard required the practitioner’s report to include a statement restricting parties to those who have agreed to the procedures performed since others may misinterpret the results, unaware of the reasons for the procedures.

This requirement created ambiguity around what constitutes “parties that have agreed to the procedures to be performed”. A narrow interpretation is that the AUP report is restricted to signatories to the engagement letter. AUP reports are often required to be provided to users such as regulators who are not parties to the terms of the engagement or posted online as required by law or regulation.

ISRS (NZ) 4400 no longer restricts the AUP report to parties that have agreed to the procedures to be performed. Guidance is provided, in paragraph A43, on the practitioner’s considerations when restricting the use of the AUP report to better meet users’ needs. This paragraph is based on paragraph A21 of ISA 800.

There are an increasing number of AUP engagements performed on non-financial subject matters. Clarifying that the scope includes non-financial subject matters (paragraph 2) and addresses market demand for such engagements (A1-A2).

Recommendations Arising from the Performance of AUP Engagements

APS-1 does not contemplate the practitioner recommending changes or improvements on matters that arose from the performance of AUP engagements. However, practitioners do get requested to make recommendations together with an AUP engagement. For example, regulators may request recommendations on improving controls relating to deficiencies identified in the AUP report.

Therefore, paragraph 33 of ISRS (NZ) 4400 requires that the AUP report be distinguished from other engagement reports (such as recommendations). Paragraph A45 guides how recommendations can be distinguished from the AUP report.

What are the changes Audit Assistant has made to its Agreed Upon Procedures template?

The updated changes are primarily around requirements and reports relating to ISRS (NZ) 4400 compared to APS-1, and subsequently, this has resulted in many wording changes. Reports have been amended to reflect the ISRS (NZ) 4400 recommended form.

The changes are focused on Planning, Strategy, Finalisation and Reporting, and Reports within the template.

Planning now includes a new page for Engagement level Quality Control. This page is for the engagement partner to complete around their obligations to ensure appropriate procedures around acceptance and continuance, documentation, adherence to professional standards, quality control management occurs throughout the AUP engagement.

Users will be prompted to use the new template and may upgrade from an existing engagement in the case of recurring engagements. We suggest waiting until a job is rolled over before upgrading.

When does the new standard apply?

ISRS (NZ) 4400 is effective for agreed-upon procedures engagements for which the terms of engagement are agreed on or after 1 January 2022. Early adoption is permitted.