Agreed-upon procedures and compilations

Accounting Ahead | Original study resource | accountingahead.com.au

Agreed-upon procedures and compilations

MODULE 5 | 5.6 | STUDENT COMPANION

Agreed-upon procedures report factual findings, with no opinion and no assurance, so every finding

must be worded objectively; comfort letters work the same way. Compilations use accounting expertise

to help management prepare information, also without assurance, and the practitioner considers

withdrawing if wrong information isn't fixed. Across audits, reviews and these services, assurance falls from

reasonable, to limited, to none.

Agreed-upon procedures

The practitioner performs procedures agreed with the engaging party and reports what it found. Users draw their

own conclusions, so the engaging party must acknowledge that the procedures suit its purpose. Lenders, grant

agencies and franchisors all use them. The international standard, ISRS 4400 (Revised), applies to

engagements agreed from 1 January 2022; Australia's ASRS 4400, issued on 11 December 2020, applies from

the same date.

Key requirements. Judgement still matters when agreeing the terms and procedures, but each procedure must

be capable of objective description, so different practitioners would reach the same findings. Under the

international standard the practitioner needn't be independent unless the terms or the law require it (the report

says whether it is), and the report needn't be restricted. Australia goes further: ASRS 4400 restricts the

report's use to the intended users it identifies, and the report states that the practitioner complied with the

principle of objectivity.

Wording the findings: Keyline Escape Rooms

Keyline Escape Rooms (imagined)

40 franchisees, each paying a royalty of 7% of their bookings. Agreed procedures at ten stores each quarter:

1. Compare reported bookings with

the booking system

2. Compare booking system totals

with amounts banked 3. Recalculate the royalty 4. List every difference

Avoid Write

Vague descriptions

'Tested', 'analysed' or 'examined', without saying exactly what was

done

Words that sound like assurance

'Audit', 'review', 'verify' or 'present fairly'

A clear finding

'We compared the bookings reported for March with the store's

booking system. Reported bookings were $48,200 and the

booking system showed $51,700, a difference of $3,500.'

No opinion: whether the royalties are right, and what to do, is Keyline's judgement

ADVANCED AUDIT AND ASSURANCE | M5 | 5.6 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Comfort letters

When a company issues shares or debt to the public, the lead managers and underwriters must show they made

reasonable inquiries about the offer document, so they often ask the company's auditor for a comfort letter.

Under ASRS 4450 Comfort Letter Engagements (issued 30 May 2012, effective 1 July 2013), the auditor reports

factual findings, not assurance, from procedures such as agreeing figures in the offer document with the

accounting records and recalculating ratios. The letter goes only to the board and the requesting parties, such as

underwriters, who sign the engagement letter, and its wording is negotiated so it never implies more comfort

than the work supports.

Compilation engagements

Accounting, not auditing, expertise: helping management prepare and present financial information, such

as a small business's annual statements, under the framework it has chosen. APES 315 governs the work in

Australia, alongside ISRS 4410 (Revised).

No verification, no assurance, but not just a typist: the practitioner understands the business and the

framework, reads the information for obvious errors, and asks management to correct records it finds

incomplete, inaccurate or misleading.

If management refuses: the international standard requires the practitioner to withdraw; APES 315 requires

it to decide, under its firm's policies, whether it can keep acting.

Has anyone checked compiled statements? Not in the assurance sense: management stays responsible,

and the report says no audit or review was performed and no opinion is expressed. A reader who needs

assurance needs a review or an audit.

A compilation, step by step

Harrowgate Shoe Repairs (imagined): the owner needs financial statements for a bank loan

1. Agree the terms

and the framework

2. Gather the

owner's records

3. Prepare the

statements

4. Read them for

anything obviously

wrong

5. Raise problems

with the owner

6. Owner

approves; report

issued

if refused

At Harrowgate

Noticed: no depreciation on the expensive stitching machines bought last year, and cash takings

for two months far below the rest of the year

Raised with the owner, who adds the depreciation and finds a missing bundle of cash records,

then approves the corrected statements and takes responsibility for them

If the owner won't fix something material

Consider withdrawing, rather than let your

name appear on misleading statements

ISRS 4410 requires withdrawal; APES 315

requires a decision, under the firm's policies, on

whether to keep acting

Management stays responsible; the report says no audit or review was done and no opinion is given

ADVANCED AUDIT AND ASSURANCE | M5 | 5.6 | STUDENT COMPANION

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Four services side by side

Audit Review Agreed-upon

procedures Compilation

Assurance Reasonable Limited None None

The report gives A positive opinion

A negatively worded

conclusion: nothing suggests

the information is materially

misstated

Factual findings from

procedures agreed with the

engaging party

A statement that the

practitioner helped prepare the

information; no audit or review,

no opinion

The user Relies on the auditor's opinion Relies on a more limited

conclusion

Draws their own conclusions,

having accepted the

procedures suit their purpose

Judges the information for

themselves

Assurance falls: reasonable, limited, none

The less assurance an engagement gives, the more the user must judge for themselves

Practice questions

MODULE 5 | 5.6 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Fix the wording

Say what's wrong with each draft finding, then rewrite it objectively.

Draft statement, and the work actually done What's wrong, and your objective rewrite

(1) 'We reviewed the grant spending and it appears reasonable.' Done:

agreed the 46 grant payments over $1,000 to supplier invoices; 3

payments, totalling $4,850, had no invoice.

(2) 'We verified the interest cover calculation.' Done: recalculated it

from the June 2026 management accounts, as clause 14 of the facility

defines it: 2.6 times, as the borrower reported.

(3) 'We tested the stock count sheets and they were mostly accurate.'

Done: counted 30 items from the sheets; 27 agreed and 3 differed by

a total of 14 units.

(4) 'In our opinion, the Ballarat store's royalty presents fairly the

amount due.' Done: 7% of April bookings in its booking system

($63,000) is $4,410; $4,410 was paid.

(5) 'We analysed the payroll and nothing came to our attention.' Done:

compared 25 employees' June pay rates with their contracts; 24

agreed, one was $1.20 an hour higher.

(6) 'The franchisee appears to have deliberately understated its sales.'

Done: compared May sales reported to the franchisor ($82,000) with

the point-of-sale report ($91,300).

ADVANCED AUDIT AND ASSURANCE | M5 | 5.6 | STUDENT COMPANION

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Question 2 - Findings for four Keyline stores

The agreed procedures for Keyline's June quarter are: (1) compare the bookings each store reported to Keyline

with its booking system total; (2) compare the booking system total with the amount banked; (3) recalculate the

royalty as 7% of the booking system total and compare it with the royalty paid. List every difference. Prepare the

factual findings for these four stores.

Store (June quarter) Bookings reported

to Keyline

Booking system

total

Amount banked Royalty paid

Bendigo $72,400 $72,400 $72,400 $5,068

Cairns $58,900 $62,300 $62,300 $4,123

Launceston $41,750 $41,750 $39,950 $2,922.50

Wollongong $66,200 $69,800 $67,100 $4,634

Procedure Your factual findings

(1)

(2)

(3)

Question 3 - Leaving out a loan

The owner of Harrowgate Shoe Repairs tells the practitioner that the owner's sister lent the business $30,000

last year, interest-free and repayable on demand, and asks for the loan to be left out of the financial statements

'because the bank might not like it'. What should the practitioner do?

ADVANCED AUDIT AND ASSURANCE | M5 | 5.6 | STUDENT COMPANION

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Worked answers

MODULE 5 | 5.6 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Fix the wording (suggested)

What's wrong Objective rewrite

(1) 'Reviewed' sounds like a review

engagement and doesn't say what

was done; 'appears reasonable' is a

conclusion

We agreed each of the 46 payments over $1,000 in the grant ledger to a

supplier invoice. For 3 payments, totalling $4,850, no invoice was

provided.

(2) 'Verified' is assurance language, and

no finding is given

We recalculated the interest cover ratio from the management accounts

for the year ended 30 June 2026, as defined in clause 14 of the facility

agreement. Our result was 2.6 times, the same as the figure in the

borrower's covenant certificate.

(3) 'Tested' is vague; 'mostly accurate' is

a judgement

We counted 30 items selected from the count sheets. For 27 items our

counts agreed with the count sheets; for 3 items they differed, by a total of

14 units.

(4) 'In our opinion' and 'presents fairly' are

audit language

We recalculated the royalty for the Ballarat store as 7% of the bookings in

its booking system for April ($63,000), giving $4,410. The royalty paid was

$4,410.

(5) 'Analysed' is vague; 'nothing came to

our attention' sounds like a review's

limited assurance

We compared the hourly rate of each of 25 employees in the June pay

register with the rate in their employment contract. For 24 the rates

agreed; for one, the register rate was $1.20 an hour higher.

(6) It speculates about intent and gives

no procedure or numbers

We compared the sales reported to the franchisor for May ($82,000) with

the point-of-sale system report for May ($91,300). Reported sales were

$9,300 lower.

Question 2 - Factual findings

Each finding states the procedure, the amounts and the difference, with no comment on why.

Procedure Findings

(1) Reported bookings and

the booking system

Bendigo: reported $72,400, booking system $72,400, no difference; Cairns: reported

$58,900, booking system $62,300, a difference of $3,400; Launceston: reported

$41,750, booking system $41,750, no difference; Wollongong: reported $66,200,

booking system $69,800, a difference of $3,600.

(2) Booking system and

amounts banked

Bendigo: booking system $72,400, banked $72,400, no difference; Cairns: booking

system $62,300, banked $62,300, no difference; Launceston: booking system $41,750,

banked $39,950, a difference of $1,800; Wollongong: booking system $69,800, banked

$67,100, a difference of $2,700.

(3) Royalty recalculated at

7% of the booking system

total

Bendigo: recalculated $5,068, paid $5,068, no difference; Cairns: recalculated $4,361,

paid $4,123, a difference of $238; Launceston: recalculated $2,922.50, paid $2,922.50,

no difference; Wollongong: recalculated $4,886, paid $4,634, a difference of $252.

What the findings don't say: whether Cairns and Wollongong under-reported deliberately, or why Launceston

and Wollongong banked less than their booking systems show. Keyline draws those conclusions, perhaps by

recovering the $238 and $252 of royalties and looking more closely at those stores.

ADVANCED AUDIT AND ASSURANCE | M5 | 5.6 | WORKED ANSWERS

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Question 3 - The loan from the owner's sister (sample answer)

Explain why it can't be left out. The loan is a real liability. Repayable on demand, it is a current liability, and as a

loan from a relative it may also need disclosing under the framework. Without it the statements are incomplete

and misleading, especially to the bank they are meant for.

Ask the owner to include it, with any disclosures the framework requires.

If the owner still refuses, the practitioner can't issue a compilation report on statements it knows are misleading.

Under APES 315 it decides, under its firm's policies, whether it can keep acting; with a material omission aimed at

a lender, withdrawing is the likely outcome. The international standard would require withdrawal.

Integrity and confidentiality. The Code of Ethics forbids being knowingly associated with misleading information.

Confidentiality still applies, so the practitioner doesn't tell the bank unless the law requires it; it documents the

discussion and considers legal advice.

ADVANCED AUDIT AND ASSURANCE | M5 | 5.6 | WORKED ANSWERS

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