Agreed-upon procedures and compilation engagements

Sometimes a client does not want an opinion at all. A bank wants someone independent to check certain figures before it lends. A sole trader wants the accounts prepared. In both cases an accountant is engaged, but nobody expects assurance. These are related services, and the standards that govern them are ISRS 4400 for agreed-upon procedures and ISRS 4410 for compilations.

The key to this topic is what the accountant is and is not responsible for. In an agreed-upon procedures engagement, the client chooses the work and the accountant reports what was found. In a compilation, the accountant prepares information from what management supplies. Neither gives assurance, and the reports must say so clearly.

The four engagements side by side

Agreed-upon procedures

Nature

In an agreed-upon procedures engagement, the client that engages the accountant also decides the procedures to follow. That is the opposite of an audit, where the auditor decides the procedures needed to reach an opinion. The accountant reports factual findings from the procedures. It is for the user to judge the procedures and findings and draw conclusions.

The report should be available only to those who agreed the procedures. Others who do not know what was agreed might misread it.

ISRS 4400 and the engagement letter

The terms are set out in an engagement letter. It includes:

• the nature and purpose of the engagement, with a clear statement that it is not an audit and not a review;
• the procedures the accountant will carry out and the information to which they will be applied; and
• the form of the report and any agreed limits on its distribution.

The process may look like an audit. The accountant plans, documents, collects evidence, reaches findings and writes a report. But with no assurance attached, the volume of work is likely to be much less than for an audit of the same information.

The report of factual findings

The report contains:

1. a title;
2. an addressee, usually the client who engaged the accountant;
3. identification of the information to which the procedures were applied;
4. a statement that the procedures were those agreed with the recipient;
5. a statement that the engagement followed the ISRS on agreed-upon procedures or relevant national standards;
6. where relevant, a statement that the accountant is not independent of the entity;
7. the purpose for which the procedures were performed;
8. a list of the specific procedures performed;
9. a description of the factual findings, with enough detail of errors and exceptions;
10. a statement that the procedures are neither an audit nor a review, so no assurance is expressed;
11. a statement that if additional procedures, an audit or a review had been performed, other matters might have been reported;
12. a statement that the report is restricted to the parties that agreed the procedures; and
13. where applicable, a statement that the report relates only to the elements, accounts or items specified.

The syllabus example is a report to the board of a manufacturer on its accounts payable at a date. It sets out the procedures, then the findings with exceptions, then the statements that no assurance is given and that the report is not to be used for any other purpose.

Background: ISRS 4400 was revised for engagements agreed on or after 1 January 2022. It keeps the principle that the client sets the procedures and the report gives findings with no assurance. The revised standard does not require the accountant to be independent but requires the report to say whether the accountant is independent. It does not require the report to be restricted. The exam uses the earlier wording, so learn that version first.

Compilation engagements

Nature

In a compilation, the accountant is engaged to prepare financial statements or other information, and not to audit or review information prepared by others. The firm is chosen for its accounting expertise, not its auditing expertise. An example is preparing the accounts of a sole trader, a club or an association. The work usually involves collecting and summarising information.

A compilation report may be issued at the end, but some assignments, such as doing a tax computation for a client, do not need a report.

No assurance is given. The client gets some comfort from the fact that the accountant must follow the professional codes of conduct and use due care and technical competence.

ISRS 4410 (Revised)

The standard was revised in 2012 after growth in demand from small and medium entities for services other than audit, especially where audit exemptions have been introduced or widened. Its requirements include these.

1. Comply with relevant ethical requirements, including integrity, objectivity, professional competence and due care.
2. Agree the terms of the engagement, including the intended use and distribution of the information, the applicable financial reporting framework, the objective and scope, the practitioner’s responsibilities and the expected form of the report.
3. Plan the work and document it.
4. Get enough knowledge of the client’s business and operations, its accounting system and records and the applicable framework.
5. If the information provided is incomplete, inaccurate or otherwise unsatisfactory, ask management to correct or improve it. If management refuses, withdraw from the engagement and tell the entity.
6. Obtain an acknowledgement from management or those charged with governance that they take responsibility for the final version of the information.

The compilation report

The report must be in writing and contain:

1. a title and an addressee;
2. a statement that the practitioner has compiled the financial information from information provided by management;
3. a description of the responsibilities of management or those charged with governance;
4. identification of the applicable framework;
5. identification of the information compiled, with the title of each element and its date;
6. a description of the practitioner’s responsibilities, including that the engagement followed ISRS 4410 (Revised) and that ethical requirements were met;
7. a description of what a compilation involves;
8. an explanation that, as a compilation is not an assurance engagement, the practitioner need not verify the accuracy or completeness of the information;
9. an explanation that the practitioner gives no audit opinion or review conclusion;
10. where a special purpose framework is used, an explanatory paragraph on the purpose and intended users, warning that the information may not suit other purposes; and
11. the date, address and signature.

The syllabus example is a compilation of financial statements of ABC Company under International Financial Reporting Standards (IFRS) for SMEs. It says that the statements and the accuracy and completeness of the information are management’s responsibility, and that no audit opinion or review conclusion is expressed.

The rules in more depth

Why “no assurance” must be stated

A reader who sees an accountant’s name on a document may assume the figures have been checked. The statements in the report are there to prevent that assumption. If a report did not say so, a user who relied on it might later claim the accountant had implied assurance.

Withdrawal in a compilation

The accountant is not an auditor, but cannot knowingly attach a name to information that is wrong. If management will not correct it, the only safe course is to withdraw and tell the entity.

Independence

A compilation or agreed-upon procedures engagement can be done for an audit client, but a firm that prepares the statements it later audits has a self-review threat. The earlier topic on non-audit services deals with safeguards.

Worked example: a bank’s receivables procedures and a club’s accounts

Agreed-upon procedures. Ridge Bank is considering a ₦200 million loan to Alder Ltd secured on receivables. The bank and Alder agree that an accountant will report on the receivables ledger of ₦520 million at 31 October. The procedures are: (1) agree the ledger total to the control account, (2) select 25 balances over ₦5 million and agree them to invoices and delivery notes, (3) send confirmations to ten customers, and (4) list balances over 90 days old.

The findings are: the ledger agrees to the control account, 23 of the 25 balances agree, two balances of ₦8 million and ₦11 million have no delivery note, eight of ten confirmations were returned and agree, and balances over 90 days total ₦92 million, which is 92 ÷ 520 = 17.7% of the ledger. The report states these facts and the two exceptions.

It does not say the receivables are fairly stated, and it is addressed to the bank and Alder only. Ridge Bank decides how much of the receivables to lend against.

Compilation. The Eagle Sports Club asks an accountant to prepare its annual accounts from its cash book and bank statements. The accountant agrees the terms, learns how the club records subscriptions, and notes that the bank statement shows ₦340,000 of receipts that are not in the cash book. The accountant asks the treasurer to explain and correct the cash book. The treasurer does so.

The accountant obtains the committee’s acknowledgement of responsibility and issues a compilation report saying that the accounts were compiled from information provided and that no assurance is given. If the treasurer had refused to correct the cash book, the accountant would have withdrawn.

How to score full marks

• State who decides the procedures. In agreed-upon procedures it is the client.
• State that there is no assurance, and say why. The report gives findings only, and the user draws conclusions.
• Restrict the report. Only those who agreed the procedures should receive it.
• For compilations, name the skill. Accounting expertise, not audit.
• Give the withdrawal rule. Ask management to correct, and withdraw if it refuses.
• Use the four-column comparison whenever a question asks you to distinguish engagements.

Common mistakes in the exam

• Giving an opinion or a negative conclusion in an agreed-upon procedures report.
• Saying the accountant decides the procedures in an agreed-upon procedures engagement.
• Forgetting to restrict the report to the parties that agreed the procedures.
• Calling a compilation a review.
• Calling a tax computation an assurance engagement.
• Leaving out the statement that other matters might have been found if an audit had been done.

Quick revision

• Agreed-upon procedures (ISRS 4400): client sets procedures, report of factual findings, no assurance, restricted distribution.
• Engagement letter: not an audit or a review, procedures and information, form of report and limits.
• Compilation (ISRS 4410): prepare information from management’s data, accounting expertise, no assurance.
• Compilation: ethics, plan, understand the client, ask management to correct, withdraw if refused, acknowledgement of responsibility.
• Compilation report: not required to verify, no audit opinion or review conclusion.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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