What Is the Difference Between Audit and Agreed-Upon Procedures?

AUP vs. Audit: Key Differences

When comparing an Agreed-Upon Procedure to an audit, the most notable distinction is the scope and assurance provided. While both services involve procedures performed by an independent auditor, they are significantly different in their objectives and outcomes.

Scope of Work

• Audit: Financial statement audits involve comprehensive examinations of the overall financial statements. The auditor reviews everything from the balance sheet to the income statement and assesses the internal controls in place. The goal is to provide a formal opinion on whether the financial statements are free from material misstatement.
• AUP: In contrast, an AUP focuses on specific financial data or targeted areas that the client wants examined. These procedures are agreed upon in advance and can range from verifying accounts payable to evaluating compliance with royalty agreements or reviewing a distressed company’s turnaround plan. The auditor only performs requested procedures without looking at the company’s full financial picture.

Level of Assurance

• Audit: Audits provide a high level of assurance because the independent auditor issues a formal opinion on the reliability of the company’s financial statements. This is crucial for stakeholders like donors, investors, or lenders who need confidence in the financial results.
• AUP: AUP engagements don’t result in an opinion. Instead, the auditor reports on the specific procedures performed, so the client can draw their own conclusions based on the findings. This approach offers transparency in specific areas, but it doesn’t guarantee the accuracy of the overall financial statements.

Cost and Time Commitment

• Audit: Because of the comprehensive nature of an audit, it requires more time, resources, and a higher level of detail. As a result, audits tend to be more expensive.
• AUP: An AUP is typically more cost-effective because it’s performed on a limited scale that only focuses on agreed-upon areas. For nonprofits or small businesses, this can be a more budget-friendly option when full financial statement audits aren’t required.

Audit vs. Agreed-Upon Procedures: When to Use Each

Each service has its place, and understanding when to use one over the other can help save time and resources and ensure the right level of financial oversight.

When to Choose an AUP

An AUP is the best choice when an organization’s leadership wants to target specific financial data, for example:

• Grant compliance: A nonprofit receiving restricted grants may need to confirm that funds were used appropriately for a specific program. In this case, an AUP engagement can target just those grant-related transactions and verify compliance without the need for a comprehensive audit.
• Internal control evaluation: If a nonprofit or small business suspects weaknesses in its internal controls but doesn’t need an overall financial statement audit, an AUP can be used to examine specific controls. For instance, the auditor might perform procedures related to accounts payable processing to detect potential fraud or errors.
• Due diligence: During a merger or acquisition, companies often need a review of particular financial areas like accounts receivable or royalty agreements. An AUP allows the parties to define the specific procedures performed on the financial data relevant to the transaction, giving clarity on key risks without the cost and time commitment of an audit.
• Contractual compliance: When a business or nonprofit must prove compliance with terms in a funding agreement, such as meeting certain financial thresholds, an AUP can provide targeted verification. For example, an auditor might verify that certain expenditures are in line with a contract’s requirements without reviewing the entire income statement.

When to Choose an Audit

Examples of when an audit is the better choice include:

• Mandatory audits for nonprofits: If a nonprofit exceeds certain revenue thresholds (e.g., $500,000 in some states), it may be legally required to undergo an annual audit. In this case, a financial statement audit is non-negotiable because it ensures compliance with regulatory and donor expectations.
• Securing large donor contributions: Nonprofits looking to build trust with large donors may need an audit to demonstrate financial transparency. Donors often rely on audited financial statements to confirm that their funds are managed appropriately and that the organization’s overall financial health is sound.
• Bank or lender requirements: When a business applies for a loan or seeks new financing, lenders often require a financial statement audit to evaluate the company’s financial position. Audits provide lenders with the assurance they need to make informed decisions on loan approvals or extensions.
• Investor confidence: For businesses, especially those planning to attract investors, audits offer an important level of credibility. An audit reassures potential investors that the company’s financial results are accurate and the internal controls in place are effective.