ACCA AAA · Chapter 27
Prospective financial information
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ISAE 3400: assumptions, preparation and reporting
PFI examination assumptions, preparation, disclosure
Prospective financial information (PFI)
- Future financial information based on assumptions
- Profit forecasts, cash budgets and capital expenditure
Forecast versus projection
- Forecast: best-estimate, expected events/actions
- Projection: hypothetical assumptions/what-if outcomes
- Projection has greater uncertainty and less evidence
Assurance available
- No opinion that future results will be achieved
- Negative assurance on reasonable basis of assumptions
- Opinion on preparation under assumptions/framework
- Warn actual results may differ materially
Acceptance
- Do not accept/withdraw if assumptions clearly unrealistic
- Or if PFI unsuitable for intended use
- Consider purpose and completeness of entity-wide view
Engagement letter
- Nature/objective, PFI, period, purpose and users
- Distribution restrictions and management responsibility
- Practitioner work, assurance level and framework
- Access, report form, deadline and fees
Management representations
- Intended use of PFI
- Completeness of significant assumptions
- Responsibility for PFI
Plan extent of work
- Misstatement risk, prior knowledge, preparer competence
- Management judgement and reliability of source data
Obtain evidence
- Best-estimate assumptions have reasonable basis
- Hypothetical assumptions fit purpose of PFI
- PFI arithmetic and internal consistency are sound
- PFI and material assumptions adequately disclosed
Challenge forecast growth
- Volume/price versus sales, capacity and costs
- Timing of investment, production and receipts
- Compare budgets, contracts, payroll and supplier prices
Report
- State ISAE 3400 basis, purpose and management duties
Check underlying figures
- Agree opening cash and actual results to records
- Compare prior forecasts with actual outcomes
- Recalculate margins, collection/payment periods
- Investigate unusual sales, receipts and supplier credit
Clairvoy Co: omissions/errors
- Remove depreciation as a non-cash item
- Include proposed loan proceeds and drawdown date
- Include loan interest and capital repayments
- Inspect finance terms, board minutes and capex plans
Distinguish conclusions
- Sales growth and cash timing assumptions need support
- Forecast is improperly prepared until corrected
- Assess assumptions separately from preparation
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