New agreed-upon procedures standard creates opportunities for practitioners

AUP engagements are widely used in Canada and the demand for these by engaging parties continues to grow. Recent standard changes approved by the Auditing and Assurance Standards Board (AASB) strengthen the usefulness of these engagements and their importance in the Canadian marketplace.

This blog will help you:

• understand the changes and how the new standard responds to the needs to stakeholders
• find clarity in the AUP report
• enhance consistency in the performance of AUP engagements

What is an AUP engagement?

In conducting an AUP engagement, the practitioner does not express an assurance conclusion, but instead performs the procedures that have been agreed with the engaging party as being appropriate for the purpose of the agreement. The practitioner communicates the procedures performed and the findings in the AUP report. Users of the AUP report consider the findings based on the procedures performed and draw their own conclusions.

In contrast, an assurance engagement involves the evaluation or measurement of a subject matter (such as financial transaction and events) against a set of criteria (such as a financial reporting framework) to reach a reasonable assurance conclusion (such as an audit opinion) or a limited assurance conclusion (such as a review conclusion). The practitioner determines the procedures that need to be performed in order to obtain the evidence needed to reduce the risk of expressing an inappropriate conclusion to an acceptable level and draws their own conclusion from the evidence obtained.

What has changed?

Canadian Standard on Related Services (CSRS) 4400 was issued in the Assurance Handbook in August 2020 and will be effective for AUP engagements for which the terms of engagement are agreed on or after January 1, 2022. CSRS 4400 replaces:

• Section 9100, Reports on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements
• Section 9110, Agreed-Upon Procedures Regarding Internal Control over Financial Reporting

CSRS 4400 is a lot more detailed in terms of requirements and application material compared to Section 9100. From this perspective it should result in more consistent performance of these engagements, particularly as it addresses challenges that are not currently addressed in Section 9100.

Key differences from the existing standards include:

1. Scope and responsibilities

The scope of CSRS 4400 has been broadened relative to the extant Sections 9100 and 9110 to meet the demand for AUP engagements on both financial and non-financial subject matters. Section 9100 and 9110 addressed only financial information other than financial statements and internal control over financial reporting respectively.

2. Independence

CSRS 4400 does not include a pre-condition for the practitioner to be independent when performing an AUP engagement. This is similar to extant Sections 9100 and 9110, which acknowledge that independence may bear on the practitioner's ability to perform an engagement objectively and refer the practitioner to the applicable rules of professional conduct/code of ethics.

However, the new standard recognizes that the practitioner may agree with the engaging party that compliance with independence requirements is appropriate for the purpose of the AUP engagement.

3. Engagement acceptance or continuance

New requirements introduce specific conditions for accepting or continuing the AUP engagement. Practitioners are required to understand the purpose of the engagement and decline the engagement if facts and/or circumstances indicate that the procedures are not appropriate for the purpose of the engagement.

4. Using the work of a practitioner's expert

New requirements and application material of CSRS 4400 provide guidance on how a practitioner's expert can assist the practitioner in an AUP engagement.

If the work of a practitioner's expert is to be used:

• The practitioner is responsible for the findings in the agreed-upon procedures report, therefore the practitioner's involvement in the work of a practitioner's expert must be sufficient for the practitioner to meet this responsibility; and
• The practitioner may refer to the work performed by a practitioner's expert in the AUP report, either voluntarily or in compliance with law or regulation. Where such reference is made, the wording of the report shall not imply that the practitioner's responsibility for performing the procedures and reporting the findings is reduced because of the involvement of an expert.

5. The agreed-upon procedures report

There are enhanced transparency requirements and the new report will include:

• identification and explanation of the various parties involved in the AUP engagement
• a statement as to whether or not the practitioner is required to comply with independence requirements, and if so, the relevant independence requirements
• a statement that the engagement was performed in accordance with CSRS 4400

CSRS 440 does not require the practitioner to include a statement that the report is restricted to those parties that have agreed to the procedures to be performed. Such a restriction is now based on the discretion of the practitioner. The application material in CSRS 4400 guides the practitioner in deciding whether to restrict the use of distribution of the AUP report.

CSRS 4400 also contains new requirements and application material to address circumstances when a summary of findings is provided in the AUP report and when the practitioner is undertaking an AUP engagement together with another engagement.

Things to watch out for

Here are some things to watch out for as you study the new standard:

Application of professional judgment

Many are confused about how professional judgment is applied in an AUP engagement given its non-assurance nature. While professional judgment (PJ) is expected to be exercised throughout the engagement, how PJ is applied will vary depending on the phase of the engagement. For example, PJ is often applied in discussing and agreeing with the engaging party about the nature, timing and extent of the procedures to be performed. However, it is the engaging party that acknowledges that the procedures are appropriate for the purpose of the engagement. This is not a judgment the practitioner has to make. While the findings from performing the procedures must be capable of being objectively verified (and therefore do not require significant PJ), the practitioner may need to use PJ in determining appropriate actions or responses if the practitioner becomes aware of such things as indications of fraud, or that the procedures cannot be performed as agreed. Further, the practitioner may need to use PJ to describe the findings in the AUP report in an objective manner and in sufficient detail.

Describing the procedures and findings

Clear communication of the procedures performed, and the related findings, is a critical feature of an AUP engagement. In fact, the practitioner is not permitted to accept an AUP engagement unless the procedures and related findings can be described objectively, in terms that are clear, not misleading, and not subject to varying interpretations. CSRS 4400 contains application material that explains this in practical terms. The procedures need to be described at a level of specificity sufficient for an intended user to understand the nature, extent, and timing of the procedures. Application guidance provides examples of acceptable terms, such as “confirm,” “compare,” “agree,” and “inspect,” as well as terms that are not appropriate, such as “present fairly,” “conclude,” “certify,” and “test.”

The role of practitioner independence

The AASB does not set independence requirements for practitioners in Canada. These are set out in the Codes of Professional Conduct/Ethics (the “CPA Code”) applicable to the practice of public accounting issued by the respective professional accounting bodies. The CPA Code does not currently address whether a practitioner is required to be independent when performing an AUP engagement under CSRS 4400. The CPA Code requires practitioners to be independent when performing “a specified auditing procedures engagement as contemplated by the CPA Canada Handbook – Assurance.” With the removal of Sections 9100 and 9110 from the Handbook, references to the CPA Code will need to be revised. However, it will take some time for this process to be completed. Accordingly, in the meantime, practitioners should consider speaking to their provincial accounting body to discuss the independence implications when applying the new standard in future engagements.

It is noteworthy that CSRS 4400 is flexible in dealing with independence matters. It recognizes that the practitioner’s knowledge of the engagement may indicate that independence is an appropriate consideration for the AUP engagement, even if the practitioner is not required by ethical requirements, law, or regulation to comply with independence requirements. CSRS 4400 specifically references the circumstance where the auditor of the financial statements of the engaging party is also engaged to conduct an AUP engagement. In such a circumstance, intended users of the AUP report may assume that the practitioner is independent for the purpose of the AUP engagement. In such a case, the practitioner may agree with the engaging party that the practitioner’s compliance with the independence requirements applicable to audits of financial statements is appropriate for the purposes of the AUP engagement.

Multi-scope engagements

The AUP report must be clearly distinguished from reports on other engagements. So, if the practitioner is asked to conduct an AUP engagement together with another engagement, the reports must either be provided in separate documents or otherwise clearly differentiated; for example, in separate sections in a document.

Where can you go for help?

CPA Canada is developing resources to support implementation of the new standard. Access the CSRS 4400 Alert here.

Keep the conversation going

Do you have specific questions about the new standard? Post a comment below or email me directly.

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.