Definition & Meaning of an Agreed Upon Procedures Engagement Letter
An agreed upon procedures engagement letter is a formal document that outlines the specific procedures an auditor or accountant will perform at the request of a client. This letter serves as a contract between the auditor and the client, detailing the scope of the engagement, the responsibilities of both parties, and the expected outcomes. Unlike a standard audit, which provides an opinion on the financial statements, an agreed upon procedures engagement focuses solely on the tasks agreed upon by both parties.
The letter typically includes the following elements:
- Purpose of the engagement: Clearly states the reason for the engagement and the specific procedures to be performed.
- Responsibilities: Outlines the responsibilities of both the auditor and the client.
- Limitations: Specifies that the findings are only applicable to the agreed procedures and not a comprehensive audit.
How to Use the Agreed Upon Procedures Engagement Letter
To effectively use an agreed upon procedures engagement letter, follow these steps:
- Draft the letter: Begin by drafting the letter, including the scope of work and the specific procedures to be performed.
- Review with the client: Discuss the letter with the client to ensure mutual understanding and agreement on the terms.
- Obtain signatures: Both parties should sign the letter to formalize the agreement.
This process ensures clarity and sets expectations for both the auditor and the client, minimizing misunderstandings during the engagement.
Key Elements of the Agreed Upon Procedures Engagement Letter
Several key elements should be included in an agreed upon procedures engagement letter to ensure it is comprehensive and clear:
- Engagement objectives: Clearly define what the engagement aims to achieve.
- Specific procedures: List the exact procedures that will be performed.
- Timeline: Provide a timeline for the completion of the procedures.
- Fees and payment terms: Include information about the fees for the engagement and payment terms.
- Confidentiality clause: Address how confidential information will be handled.
These elements help ensure that both parties have a clear understanding of the engagement's scope and expectations.
Who Typically Uses the Agreed Upon Procedures Engagement Letter
Various entities may utilize an agreed upon procedures engagement letter, including:
- Businesses: Companies may request specific financial procedures to be performed, such as verifying compliance with regulations.
- Non-profit organizations: Non-profits often use these letters to ensure transparency in financial reporting.
- Government agencies: Agencies may require agreed upon procedures for accountability in the use of public funds.
Each of these entities benefits from the tailored approach of an agreed upon procedures engagement, allowing for focused assessments without the broader scope of a full audit.
Examples of Using the Agreed Upon Procedures Engagement Letter
Practical examples of when an agreed upon procedures engagement letter might be used include:
- Financial compliance: A company may hire an auditor to verify compliance with specific financial regulations.
- Grant reporting: Non-profits may need an auditor to confirm that grant funds were used according to the terms of the grant.
- Inventory verification: A business may request procedures to confirm the accuracy of inventory records.
These scenarios illustrate the versatility of the engagement letter in addressing specific financial concerns.
Legal Use of the Agreed Upon Procedures Engagement Letter
The legal use of an agreed upon procedures engagement letter is essential for establishing a formal agreement between the auditor and the client. It provides legal protection for both parties by clearly outlining the scope of work and expectations. In the event of a dispute, the letter can serve as a reference point for the agreed terms.
Key legal considerations include:
- Mutual consent: Both parties must agree to the terms outlined in the letter.
- Compliance with regulations: The procedures performed must comply with relevant laws and regulations.
- Documentation: Proper documentation is necessary to support the findings and conclusions drawn from the procedures.
Important Terms Related to the Agreed Upon Procedures Engagement Letter
Understanding key terms is crucial when dealing with an agreed upon procedures engagement letter. Some important terms include:
- Agreed Upon Procedures (AUP): Specific tasks that the auditor agrees to perform.
- Engagement Letter: The formal document outlining the agreement between the auditor and client.
- Findings: Results of the procedures performed, which are reported back to the client.
- Scope of Work: The defined boundaries of the engagement, including what will and will not be covered.
Familiarity with these terms helps ensure clarity and understanding throughout the engagement process.
Steps to Complete the Agreed Upon Procedures Engagement Letter
Completing an agreed upon procedures engagement letter involves several steps:
- Identify objectives: Determine the specific objectives of the engagement.
- Draft the letter: Include all necessary elements, such as scope, procedures, and fees.
- Review with stakeholders: Ensure that all relevant parties understand and agree to the terms.
- Finalize and sign: Obtain signatures from both the auditor and the client to formalize the agreement.
By following these steps, both parties can ensure a clear understanding of the engagement and its expectations.
