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What are agreed upon procedures?
- Agreed upon procedures focus on what you specifically want to look at. It is an engagement between your company and an accountant to issue a report of findings on specific procedures. Based upon the company’s direction, the procedures to be used are agreed upon in advance, hence the name “agreed upon procedures.”
Because this is not a full financial statement audit, you will decide on the type and extent of the procedures to be performed. Although the auditor’s report does not express an opinion on the findings, it does provide a very detailed accounting of the procedures used to preprare the report. This can result in better accounting practices at your company.
When should you consider hiring an auditor to do an agreed upon procedure analysis?
- You should consider hiring an auditor to do agreed upon procedures if you have concerns about specific financial or operational aspects of your company.
For example, you may be worried about your payroll practices, rates of return on specified investments, or outstanding checks appearing on a bank reconciliation. Upon performing the agreed upon procedures the auditor will generate a detailed report about the payroll department procedures and its attention to detail, verify if the resultant rate of return agrees with the percentages in the identified schedules and will trace if the outstanding checks cleared in the subsequent months.
What are the benefits of agreed upon procedures?
- Obtaining loans: A bank may need assurances on receivables and inventory that serve as collateral for a loan. Your auditor can perform agreed upon procedures on those specific financial statement elements. The report generated as a result could be more helpful to the banker and less costly to you.
- Staying compliant: If you work for a government or nonprofit agency through agreed upon procedures your agency can focus on specific regulatory requirements to determine the agency’s compliance.
- Winning contracts. If you are a Government contractor, the awarding agency may require a CPA perform agreed upon procedures on your indirect costs for a specific time frame to determine if the rates and cost principles used are in compliance with current regulations. The auditor’s findings will help you develop a comprehensive indirect cost allocation plan and a job cost accounting system – both critical to winning and keeping Government contracts.
Agreed upon procedures will not replace an audit. However, they are helpful in identifying and correcting certain accounting procedures with the goal of rectifying them and improving your organization’s controls.