In certain circumstances, businesses may need to hire CPAs to perform agreed-upon procedures (AUPs) instead of (or in addition to) a review or an audit. AUPs are a type of attestation engagement “in which a practitioner performs specific procedures on subject matter and reports the findings without providing an opinion or conclusion,” according to the standards set forth by the American Institute of Certified Public Accountants.

AUPs generally cost less and take less time than a review or an audit. Plus, their versatility allows them to address nonfinancial matters and dig deeper into items reported on your financial statements.

The basics

In general, an AUP engagement uses similar procedures to a review or an audit, but on a smaller and limited scale and with no assurance on the part of the CPA. An engagement letter is used to outline the scope and nature of the specific procedures that will be performed.

Upon completing AUPs, CPAs issue a written report that 1) describes the procedures performed and 2) summarizes the findings from each procedure. The accounting standards also require an AUP report to contain the following:

• A title that includes the word “independent” to show the report is from an independent accountant,
• Identification of the engaging party, the subject, and responsible party (if it’s not the same as the engaging party),
• The intended purpose(s) of the engagement,
• A statement that the practitioner didn’t conduct an examination or review,
• A statement that the practitioner doesn’t express an opinion or conclusion, and
• Reservations or restrictions concerning procedures or findings.

AUPs can be tailored to your organization’s needs and provide a targeted analysis into key areas of your business’s operations.

AUPs in the real world

Examples of areas where an AUP can provide clients and third parties with valuable insights include:

• Internal control evaluations,
• Grant compliance,
• Franchise agreement compliance,
• M&A due diligence,
• Construction project progress and spending practices, and
• Royalty payments under a licensing agreement.

Lenders also may want to confirm whether a company is in compliance with its loan covenants. Or if a lender waived a loan covenant violation during the year-end review or audit, the bank might request, as a condition of the waiver, that the borrower hire a CPA to perform AUPs to check on key financial metrics midyear.

We can help

AUPs are among the many services CPAs offer. These engagements can be a flexible, time-saving alternative (or add-on) to financial statement reviews and audits. But they have their limitations. Contact us to determine whether an AUP engagement is right for your situation.

With a median loss of $766,000, financial misstatement schemes are the costliest type of fraud, according to “Occupational Fraud 2024: A Report to the Nations,” a study published by the Association of Certified Fraud Examiners. Fortunately, auditors and forensic accountants may be able to detect financial statement fraud by testing journal entries for errors and irregularities. Here’s what they look for and how these tests work.

Suspicious entries

Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, provides valuable audit guidance that can be applied when investigating fraudulent financial statements. It notes that “material misstatements of financial statements due to fraud often involve the manipulation of the financial reporting by … recording inappropriate or unauthorized journal entries throughout the year or at period end.”

Financial misstatement comes in many forms. For example, out-of-period revenue can be recorded to inflate revenue — or checks can be held to hide current period expenses and boost earnings. Accounts payable can be understated by recording post-closing journal entries to income. Or expenses can be reclassified to reserves and intercompany accounts, thereby increasing earnings.

To detect these types of scams, SAS 99 requires financial statement auditors to:

• Learn about the entity’s financial reporting process and controls over journal entries and other entries,
• Identify and select journal entries and other adjustments for testing,
• Determine the timing of the testing,
• Compare journal entries to original source documents, such as invoices and purchase orders, and
• Interview individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries or other adjustments.

Forensic accountants also follow audit guidelines when investigating allegations of financial misstatement. And financial statement auditors may call on these experts when they notice significant irregularities in a company’s financial records.

Testing procedures

AICPA Practice Alert 2003-02, Journal Entries and Other Adjustments, identifies several common denominators among fraudulent journal entries. Auditors will ask for access to the company’s accounting system to test journal entries made during the period for signs of fraud.

Specifically, they tend to scrutinize entries made:

• To unrelated, unusual, or seldom-used accounts,
• By individuals who typically don’t normally make journal entries,
• At the end of the period or as post-closing entries that have little or no explanation or description,
• Before or during the preparation of the financial statements without account numbers, and
• To accounts that contain transactions that are complex or unusual in nature and that have significant estimates and period-end adjustments.

Other red flags include adjustments for intercompany transfers and entries for amounts made just below the individual’s approval threshold or containing large, round dollar amounts.

Getting professional help

Financial misstatement can be costly, but your organization can take steps to minimize its risk. External financial statement audits, surprise audits, and forensic accounting investigations can help identify vulnerabilities and unearth anomalies. Contact us for more information, including how we use computer-assisted audit techniques to review accounting transactions.

There are currently more than 33 million small businesses in the United States, according to the U.S. Chamber of Commerce. To succeed in today’s competitive markets, it’s essential for your business organization to have accurate books and records.

Bookkeeping vs. Accounting

For starters, you should understand the distinction between bookkeeping and accounting. Bookkeeping refers to the systematic storing of financial documentation, such as receipts, purchase orders, and invoices, as well as recording of daily financial transactions, such as purchases and sales of goods and services. In general, bookkeeping is the basis for accounting. Bookkeepers record journal entries — that is, debits and credits — for each transaction using accounting software, such as QuickBooks®, NetSuite®, or Xero™. However, bookkeepers do more than data entry; they also may be responsible for sending invoices, processing payments and payroll, conducting banking activities, and reconciling accounts.

Accounting involves classifying, interpreting and communicating financial transactions. Accounting uses the records maintained by the bookkeeper throughout the period to generate historic and prospective financial statements. These reports — balance sheets, income statements and statements of cash flow — provide financial insights that help management and external stakeholders evaluate financial performance.

2 methods

Business owners must choose a method for recording and classifying financial transactions. There are two main options for small and midsize businesses:

1. Cash accounting. Under this simplified method, a business records revenue when cash is received and expenditures (such as expenses and asset purchases) when they’re paid.

2. Accrual accounting. This method is prescribed under U.S. Generally Accepted Accounting Principles. Here, revenue is recorded when earned, and expenses are recorded when incurred, without regard to when cash changes hands. It’s based on the principle that revenue should be “matched” to the related expenses incurred in the reporting period. The chart of accounts for an accrual-basis business includes such items as accounts receivable (invoices that have been sent but haven’t yet been paid by customers) and accounts payable (bills that have been received but haven’t yet been paid).

It’s important to choose one accounting method and stick with it as you record transactions (a bookkeeping function) and prepare your financial statements (an accounting function). Some organizations start with cash accounting and switch to accrual accounting as they grow.

Getting professional help

Complying with accounting rules, tax laws, and payroll regulations can be overwhelming for many closely held businesses. Fortunately, you don’t have to go it alone. We can help you set up and maintain a reliable system of reporting financial transactions in an accurate, timely manner. Contact us for more information.